What will be the effect of the recent cut of the policy repo rate by the Reserve Bank of India (RBI) on the banking sector? Will broad interest rates come down? As Table 1 shows, RBI’s policy rate is coming off the high it reached following the sequential raises to control inflation that characterised RBI’s actions after cuts at the time of the 2008 financial crisis. However, the gap between the policy rate and State Bank of India’s prime lending rate is much wider than it was before the crisis, and shows no signs of narrowing.
Meanwhile, as Table 2 reveals, credit growth has been outpacing deposit growth anyway, so it is unclear what an further cut in bank rates will achieve, or if there is space for it. As Table 3 shows, there is a major difference in the way public-sector and private sector banks manage non-performing assets (NPA), and the former are the source of the weakness in the banking sector. The private sector has carefully controlled its net NPA ratio and thus seen increasing returns on assets and profit per employee; the public sector has drawn no such benefit. The problem is similar when it comes to debt restructuring, as Table 4 lays out. Public sector banks have done much worse than have private-sector or foreign banks — and, unlike other banks, for them the problem is getting worse the further they are from the 2008 crisis.
How does the market regard bank stocks, given these problems? As Table 5 reveals, the variation between the best and the worst performers over the past 5 year has been considerable. However, as Table 6 shows, the top five bank stocks have largely increased in price of late.(Click here for tables)
