After almost a decade the Indian financial
sector seems to be out of troubled waters. Almost all significant banks are
beyond solvency concerns and set to progress in the path of growth. The asset
quality has shown steady improvement for most banks despite Covid disruptions.
The loan growth has improved from historic lows seen in the past few years.
Earning growth is strongly aided by healthy recovery from the bad accounts.
Moreover, the loan books of most tier 1 and
Tier 2 banks are tested for stress and provisions are adequate to meet most
foreseen adversities. These institutions have come a long way from the first
announcement of Dirty Dozen (the largest 12 non performing accounts) in the
summer of 2017. Eight of the notified 12 accounts have been resolved with more
than 50% recovery. Resolution is under progress for two accounts and the other
two are under liquidation. As of the end of FY22, no major potential stressed
account has been reported that can materially alter the current status of any
bank. The credit cost from hereon will mostly be under control with some
defaults in the normal course of business.
The best part is that the rather stringent
provisioning and disclosure norms have significantly enhanced the credibility
of the books of banks. The capital adequacy is positive for aggressive lending.
Obviously the outlook for Indian banks is bright and buoyant.
Most of the non-bank lenders (NBFCs) are also
back on the path of steady growth. The asset liability mismatch (ALM) and asset
quality concerns have been mostly addressed by almost all meaningful NBFCs.
Many weaker players have been eliminated from the market. For the survivors,
the business is brisk and profitable.
Obviously, for the investors in the financial
sector better times lie ahead, even if the consensus overweight on the
financial sector might slow down the trajectory of gains a little.
Notwithstanding the air of optimism all around,
the sky may not be all blue and bright. There are scattered clouds that do not
look menacing as of this morning; but certainly warrant a watch.
I shall be in particular watching some
conglomerates that are growing too fast (both organically and inorganically)
and are considerably leveraged. In some cases the leverage appears supported by
the balance sheet that might have been engineered to look healthy but not
necessarily backed by tangible assets. The cash generation is poor; thus the
servicing capability could be severely impaired if the things do not go as per
the plan, raising the spectre of dirty dozen all over again.
The number of systemically important (too big
to fail) financial institutions is also growing steadily. The regulator (RBI)
is keeping a closer vigil on these institutions. Additional regulatory
provisions have also been prescribed for these. Nonetheless, in case of a
global contagion like dotcom (2001-2001) or global financial crisis (2008-2009)
the probability of a “big tree collapsing” in India is now certainly not zero.
From the business viewpoint, I hope that while aiming to achieve global size and economies of scale, the Indian managements would have learned key lessons from the decline of global conglomerates like General Electric and General Motors and demise of Lehman and Merrill Lynch etc.
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