The year 2012 wasn’t exactly conducive for banking stocks on policy, but the BSE Bankex still gained 57 per cent to outperform markets. Strong performance was largely due to private bank stocks which benefited from the cut in Cash Reserve Ratio and were less affected by tighter provisioning norms. The expectation of rate cuts remained through the year, though the RBI didn’t oblige very readily. As rate cuts didn’t materialise and economic growth moderated, public sector banks trailed private sector peers.

Basel III capital adequacy norms, which are yet to be implemented, are expected to hit public sector banks the most, given their low return on assets and capital raising constraints due to less likelihood of dilution in the promoter’s (government of India) stake.

The expected dynamic provisioning norms and any further tightening of provisions on restructured loans may further dent the profitability of public sector banks, given their higher non-performing assets (NPAs).

Screws were tightened on NBFCs too which led to funds drying up for them. While the reduction in bank exposure limits hit gold financing companies, new securitisation norms impacted fund flows to many other NBFCs.

The draft prudential regulations for NBFCs are expected to further tighten the regulatory noose. Hike in standard asset provisioning and NPA recognition change from 180 days to 90 days in a phased manner will impact profitability. Gold loan NBFCs also had to reduce the loan-to-value ratio at which they were lending.

SEB package effect

Looking ahead, some public sector banks may benefit from the financial restructuring package announced by the government for the State Electricity Boards. They carry loans to the tune of Rs 2.46 lakh crore from the sector. The RBI cut policy rates only by 50 basis points during the year, using cash reserve ratio and open market operations heavily to prop up liquidity. The 1.75 percentage points cut in cash reserve ratio, which infused more than Rs 1.1 lakh crore of liquidity, reduced costs by just 13 basis points.

It has also increased avenues for liquidity by cutting SLR ratio, enhancing the limits of marginal standing facility and also increasing the limit for export refinancing from 15 per cent to 50 per cent. This ensured that the short-term borrowing rates remained closer to the repo rate in spite of strained liquidity. It has also been buying back bonds from time to time to infuse liquidity.

The RBI has made it clear that enactment of the Banking Amendment Bill will be the necessary condition for granting new bank licences. Given that the Banking Amendment Bill was cleared recently by the Lok Sabha, there is some clarity on new bank licences. This led to a few NBFC stocks rallying more than others.

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