Public Sector Bank Meltdown: Is any banking stock worth investing?


Public sector banks are in storm again. This time due to ₹ 11,000 crore PNB scandal which has rocked the market. At all time high and elevated valuations, market has been waiting for bad news and it keeps on coming. First, long term capital gains taxation on equities and now, public sector bank meltdown. These corrections mean that both good and bad all stocks will go down and present investment opportunity. PSU Banks have crashed and some investors are thinking if it is a right time to buy. Let’s go into the details.

Surging NPA (Non Performing Assets)

NPA (Non Performing Asset) has been on the rise in almost all public sector banks & a few private banks as well. NPA are those loans where bank is not able to recover its dues for more than 90 days or as per period defined by RBI from time to time. India’s NPA problem surfaced two years ago but it is refusing to go down any soon. Government is aiding banks with packages from tax payer’s pocket but it is not going to help, as it is too big a balloon which is only getting inflated day by day.

Below chart depicts NPA as % of loans for major public & private sector banks.

Bank NPA 2018.PNG

Leading the pack is IDBI Bank with 25% NPA which is scary. This means one fourth of people have refused to pay back to the bank. Indian Overseas Bank and UCO Bank are also not far behind. Among private sector banks, ICICI Bank is worst performing with almost 8% NPA while HDFC Bank has very well maintained NPA of 1.24%. To put this into perspective, the usual NPA for a bank should not be more than 2 to 3 % and anything above that is alarming. This simply means that all public sector banks will never be able to heal themselves without government support. If you have savings deposited in public sector bank, it is time to change bank to be on the safer side.Global NPA %.PNG

Among major economies of the world (excluding bankrupt countries like Greece), India ranks second in the world with NPA at 9.6%. This NPA is calculated by factoring all banks and other financial institutions in a country. If you see countries like UK, Canada & USA, they have NPA less than 2%. Even China where banks are aggressively propelling growth by funding infrastructure projects, NPA stand at 1.8%. Unfortunately, it seems among big economies, only India is growing by leaving a huge tail behind which will bounce back in the future.

Fixing the Root Cause

It is a well known fact that public sector banks are working in terrible conditions. Most of the public banks have high number of branches which are run by staff many of who are low on motivation & skills. Corruption is rampant and scrupulous businessmen are quick to exploit such opportunities. No wonder most of the defaults are on corporate loans and not on personal loans. Also the “entity” concept of company law shields a firm’s promoters as they are not personally liable for the defaults done by a company. Many  good customer and corporates who want quality service have migrated to private sector banks. Usually such customers are good in repaying their debt and add stability to the bank operations.

At present most of public sector bank customers are either in rural areas where private banks have not yet penetrated or corporates who deliberately remain glued with less efficient public sector banks in hope for some bargain. (Disclaimer: I can be wrong here as this is based on my personal observation and discussions with many bankers). Till the time root cause of public sector banks are not fixed, they will continue to bleed and any relief package from government will be more of a bandage and not the cure.

In case of Nirav Modi, he simply kept on taking multiple credit guarantees from PNB while not paying the earlier ones. This went on from 2011 until 2017 when one of the key staffs retired and the replacement officer refused to issue another guarantee to cover the default on old guarantee. Such a massive scale of fraud and “ponzi” kind of credit guarantees are not possible without senior management knowing about it. But then it’s public sector bank and it is tax payers money, who cares about them?

Truly, corrupt businessmen are responsible for exploiting it but the root causes are lack of effective monitoring and corruption in public sector banks.

Any Bank Stocks to Buy?

Certainly no public sector bank stocks. Even SBI with its all goodness, will suffer from the ongoing bank consolidation where it is being gifted with bad loans from other banks. We covered the pains of PSU Banks in an AI post published in May’17 (click here to read). As ace reader of this post, we hope that you had stayed away from public banks and avoided the losses.

If India has to grow at 8% annually, banks have to play a major role to fund this growth but large part of this funding will come from private banks & non-banking financial institutions. On going correction have pulled down many private sector banks and they can be good bargain for long term investors. IndusInd, Kotak Mahindra, Yes Bank, Dewan Housing, Can-Fin Homes, IDFC Bank all these are good opportunities in this space which can be researched before investment.

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