PSU BANKS: SHOWING INDRADHANUSH COLORS

So its definite now, our stock markets are going through anxiety. There is no other way of defining it. Positive opening was expected after Reserve Bank of India and the Government together came out to defend and support PSU banks. But not 600 points, it is the biggest intra-day gain since May 2014 and Bank Nifty up by 3.4%!! So we are good now. All PSU banks are up and making smart intra-day gains, especially Bank of Baroda rising by some 26%. It shows nothing but absolute faith in the system. But how did we arrive at this dreadful juncture with the losses of thousands of crores and NPA ratios in double digits. Almost 5.64% of total advances of PSU banks constitute gross non performing assets till September quarter?

Actually our PSU banks stopped celebrating Diwali some 12-13 years ago. No Diwali, so no clean up sessions, unwanted stuff kept bundling up, till Mr. Rajan came on the scene and extended Swachh Bharat Abhiyaan to banking sector and also gave a time frame i.e everything should be spic and span by March 2017.  And so it all started with asset quality review of PSU Banks, confirming the dire state of government sector banking. These government banks are not the only one’s to blame, a major part of it goes to our political machinery forcing them to lend at lower rates, even below their base rates to support infrastructure and power sector as no contribution came from private banks during 2008 crises. In addition to that, political interference in decision making made matters worse resulting in poor credit review, accumulation of highly risky portfolio, huge provisions and low profitability.

Fast forward to third quarter FY16, as per RBI directions, PSU banks decided to clean up their books in the last two quarters of this fiscal and thus whopping provisions and soaring non performing asset ratios. Bank of Baroda is the only PSU bank which has completed its asset quality review in December quarter and is promising 20% growth next fiscal and without equity dilution which justifies its intra-day gain today. With respect to capital infusion from the government, all PSU banks do not require it and can meet BASEL III norms once the cleaning session is over and they would be galloping towards growth again.

So this time we are really going to celebrate Diwali especially PSU banks as luckily we have our RBI governor and central government which believes that cleanliness is not only godliness but also growth.