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Mar 09, 2018, 16:05
Banks rebound. Here is the reason
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Banking failures have adverse effects on the growing economy and have negative effects on the country and its people. The Banking sector has witnessed a continuous decline in the capital market since a past few sessions, especially after the PNB fraud. But, Bulls were back in power at Dalal Street on Thursday as the short covering in banks led to the rise in indices in the last hour of trade.

 

The market rallied for the first time after a very long time. Banking & financials stocks rallied smartly on short covering as the Nifty Bank index was up 343 points and Public Sector Undertaking (PSU) Bank index rose 2.8 percent. Federal Bank, Bank of Maharashtra gained 2-8 %, while ICICI Bank, HDFC Bank, SBI, Punjab National Bank, Bank of Baroda and HDFC rallied 1-4 %. SBI (4.09%), ICICI Bank (3.58%) were the top Sensex gainers.

 

Also, Bandhan Bank Ltd is going public on 15 March, launching up to Rs4, 473 crore, which will be the biggest ever initial share sale by a local bank.

 

The recovery was led by banking sector stocks with BSE Bankex rising 389 points or 1.43% to 27559 points, while Bank Nifty rose 343 points or 1.42%, after recovering over 400 points from the day's lows.

 

Finance Minister Arun Jaitley on Tuesday said the fraud-hit Punjab National Bank (PNB) has "sound fundamentals" and high potential to raise capital through sale of non-core assets. "With a high share of current account and savings account deposits, low cost-to-income ratio, robust credit growth, stabilisation of gross non-performing assets, healthy provision coverage ratio of over 60 per cent and high potential for mobilising capital through sale of non-core assets, PNB too has sound fundamentals and strong growth potential", the minister said in a written reply to Rajya Sabha. Well on March 8, Manoj Murlidharan of Religare Securities told CNBC-TV18, "Punjab National Bank (PNB) can be a good buy.

 

The underperformance of bank is been worrying problem to the economic system and overall growth of the economy. The month of February has been a hurdle especially for the PSBs. Initially, Bank of Baroda faced questions on business practices and customers in South Africa. Also the State Bank of India declared a quarterly loss, its first in 17 years. Finally, Punjab National Bank announced 12700 crore fraud, which shocked the entire banking system of India. Hence, the privatisation of the PSU’s was one of the solutions to these banking system failures. But was the solution acceptable to all?

 

The Indian National Bank Employees Federation said in the letter that privatisation public sector banks (PSU banks) would result in destroying their huge branch network across the country. They stated that it will not only be counterproductive but also lead to self-destruction of a well-knit huge branch network across the length and breadth of the country that services crores of people.

 

In support of the Indian National Bank Employees Federation (INBEF), some analysts pointed out to the worldwide experience of PSU banks repeatedly becoming effective instruments to battle financial crises. For instance , the role played by state-run banks during 2008 financial crisis in the US, which set off a global depression, when major private commercial banks in developed markets were on the verge of going bust and they had to be saved with public money.

 

After the PNB scam, The Videocon debt is another talk of town. The lender banks plan to drag Videocon to bankruptcy court. These lender banks have an exposure of over 20000 Crore , from which State Bank of India’ s dues amount to Rs 3900 Crore as it stands as a lead lender. It had filed separate insolvency proceedings against Videocon Industries and Videocon Telecommunications Ltd, last month. Apart from SBI, the other lenders include Punjab National Bank, Dena Bank, Central Bank and Andhra Bank.

 

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To save the economic growth from declining and people’s trust over PSUs, the finance ministry asked the PSU banks to closely examine bad loans which are above 50 crore, for any possible fraud. To ensure that bank doesn’t face the problem of bad loan in immediate future, the central bank of India directed the MDs of PSU banks to detect frauds and refer cases to CBI examining all non-performing assets (NPAs) over Rs 50 crore for possible fraud. The government has told to take pre-emptive action and identify and address operational and technological risks.

 

As per the last reports February 2018 from the central bank, India’s banking sector is sufficiently capitalised and well-regulated.

 

Following chart shows the growth in deposits in the banking sector over the past few years.

 

 

During FY 15, deposits grew at a Compound Annual Growth Rate (CAGR) of 1479 and then declined to 1466 and again rose to 1541 in FY 17.

 

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