GAUTAM BUDDHA-INDIAN BANKS

Legal notices have started coming and moratorium have been refused to most of the people.  Legal notices since banks refused to provide moratorium and now they are chasing the retail clients. Who got the moratorium is now a big question. Did the SME or Corporates get the benefit of Moratorium? This question will be answered post 31st August 2021.  Banking frauds have created an immense problem for the proper functioning of the Indian banking system and the biggest suffer are those who need the help of the same.   Banks don’t want NPA and hence let the goose get chopped even if the eggs don’t come forever. RBI might be accommodative but not Indian banks. We don't how much loan restructuring will be required and how long the pains will be carried. Indian Banks are meditating now for the economic consequences, political driven restructuring and provisioning.

Private Banks kept away from the moratorium in many cases and no idea about what classification tools have been used for refusing. In the market, there is an expectation of interest rates cut down. RBI might go ahead with 40 bps or 75 bps of a rate cut in the next H2 of this financial year. The reason for banks to go ahead with rate cut is not to provide any temptation or economic relief to borrowers. Who will borrow when there is no vision currently and all capex have been postponed and retail client are struggling with job market and service pay cuts.  The Indian banking system will require the injection of liquidity in the H2 of this fiscal year which cannot be ignored. Now, under the current fiscal deficit where the Indian government will get the funding when the deficit is expected to grow to 10% to 12% (including state).  Under these circumstances reducing the rate of interest is the key to get liquidity injected within the system.  The rate of interest reduction will be big boost followed with G-Sec and also the bank liquidity ratio to be self-managed.

Well, every rate of reduction is not passed to the end consumer. This has been seen in the past and now its more evident that the same will be used to manage the NPA and providing funding at low cost to NBFC. The margin of reduction is often being used by the bank for its income.  NBFC will require low-cost funding as currently, they have low liquidity options. Low-interest rates will help NBFC to borrow and keep the flow of liquidity alive. Banks will pass the risk to NBFC and NBFC will keep low-interest rates as a margin to make a return and keep funding alive in micro markets.

In the current circumstances, the percentage share of funds deployed by MFs in corporate debt paper of NBFCs in June 2020 have moderated as compared to March 2020 of debt AUMs and are lowest since July 2018. Further Investments in CPs of NBFCs had been on a consistent decline every month. Banks don’t have much wide range for the area of penetration for providing funding to the Micro markets. Hence NBFC is the clear winner but they don’t have much liquidity too. In these circumstances, a low cost of borrowing from the banks to the NBFC and then NBFC to micro-markets will keep the consumption alive for micro markets.

MF industry will not provide liquidity to NBFC even in the near term. This sector is being avoided and this place will be filled up by the Banks. Reduction of interest rates does not necessarily mean that the benefit will be passed to the consumer directly but it will be passed in a different route. Further Banks investments in other inter-banks treasury will help them to earn. 

Banks are not much in healthy space. They have kept a huge amount of money for managing NPA as provisions.  This provision may or may not fall short but it reduced the disbursement abilities and risk measurement increases.   Currently around Rs 15000 cr are set aside for provisioning for the Indian banks. This money is not getting to get into any pockets. Few of the analysts were jubilant that retail loans have picked up. Well, Work from Home has increased the demand for laptops, AC Mobile and other equipment which are either funded on credit card EMI or paid by the company till it gets bounced as mostly they are reimbursements.  

Banks FD is finding more investments as compared to another form of products like MF. The reason being a safety from any fiasco from the Mutual Fund space. No one wants to get Franklin to be repeated.  We find that RBI 7.15% Bond has also attracted a significant amount of inflow into the system. 

RBI rate cut decision will be an alternative tool for injecting liquidity into the system as banks have now significant provisioning for losses, NPA management and also NBFC to be funded properly since they are the last resort to the stepchild.  WAR with china and its economic consequences of funding cannot be avoided. Many Chinese projects and funding have been under a cloud due to the current tension and this will also get counted on the economy at a later stage.  We agree that many countries are looking towards India but not currently but all in the long term.  Hope it is clear why Gautam Buddha Image has been used for Indian Banks.