Most banking stocks traded with healthy gains in intraday trade on September 30, pushing their sectoral index higher.
The Nifty Bank index jumped 1,163 points, or 3% in intraday trade after the Reserve Bank of India (RBI) raised repo rates by 50 bps. The banking index closed 984 points, or 2.61%, higher at 38,631.95 with all stocks in the green.
Shares of Federal Bank (up 5.62%), Punjab National Bank (up 4.87%), IDFC First Bank (up 4.71%), Bank of Baroda (up 4.16%) and IndusInd Bank (up 4.01%) ended with solid gains.
With this, the Nifty Bank index snapped the losing streak of the last seven consecutive sessions.
The banking stocks gained after RBI Governor Shaktikanta Das said bank credit expansion was buoyant.
"Bank credit grew at an accelerated pace of 16.2% year-on-year (YoY) as on September 9, 2022, as against 6.7% a year ago. The total flow of financial resources from banks and non-banks to the commercial sector has improved significantly to ₹9.3 lakh crore in this financial year so far (up to September 9) from ₹1.7 lakh crore in the corresponding period of last year," said Das.
Besides, Das said that the RBI was planning to bring in the expected loss (EL) based approach for loan loss provisioning by banks.
"Banks currently follow the incurred loss approach for provisioning on their loan assets, whereby provisions on loan assets are made after the stress has materialised. A more prudent and forward-looking approach is the expected loss-based approach, which requires banks to make provisions based on an assessment of probable losses. As a step towards converging with globally accepted prudential norms, we will issue a discussion paper on the proposed transition for stakeholder comments," said Das.
"RBI has now decided to introduce a framework for securitisation of stressed assets. This will provide an alternative mechanism for securitising NPAs, in addition to the existing ARC route. A discussion paper (DP) on the proposed framework is being issued for feedback from stakeholders," Das added.
As per brokerage firm YES SECURITIES, loan loss provisioning based on the expected loss approach, if implemented, could generally serve as upfront provisions to some extent since current IRAC norms mandate a provision of just 15% when a loan turns 90 dpd and 25%, cumulatively, when a bad loan ages to one year.
At the same time, provisioning based on expected loss could smoothen out provisions over time rather than bunch up on a back-ended basis.
Thirdly, for lenders that run business models where the steady state bad loan ratios are on the higher side but the loss given default (LGD) is on the lower side, due to sound collateral, may see some decline in actual provision levels. An example of such a lender could be City Union Bank, said YES SECURITIES.
On securitization of stressed assets, YES SECURITIES said if it is implemented, it would serve to deepen the market for stressed assets and enhance the avenues available to lenders to resolve stressed assets.
The outlook for the sector is improving and analysts expect the bank credit growth to remain strong in the short term.
"A perfect tango of strong credit growth outlook, rising interest rates and positive liquidity makes a perfect case for lending financials like banks. The latest print of 16% was a decadal high print for credit growth and with the coming festive season, the trend looks promising. Also, rising interest rates typically help banks as assets get reprised faster than the liability book and this helps in increasing net interest margins," said Hemang Kapasi, Head of Equity, Sanctum Wealth.
"The other important aspect of the monetary policy was measured to tackle the liquidity deficit in the system as the governor assured would be temporary and should be seen in the context of large potential liquidity arising from higher government spending in the latter half of the year," said Kapasi.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
