Indian Banks in for Long Gloom Phase – Govt Policies Punishing The Good not Thugs

The incompetent Government of India under Scandalous Prime Minister, Dr Manmohan Singh Locked in Policy & Governance Paralysis displeased the Foreign Investors who are on a Selling Spree in Indian Debt & Equity over the last 2 Months has led to the sharp Fall in Indian Rupee. The RBI which is at loggerheads with the Finance Ministry over Monetary Policies took Drastic Measure to suck all excess Liquidity to stabilize the Indian Rupee has been in Vain as neither the Rupee halted its decline nor the Inflation came under control. All this has led to the Punishment of Citizens and Businesses operating under the ambit of RBI and Tax Authorities while the Goons & Thugs(Politicians) operating in the Black Money sectors of Gold, Silver and Real Estate are largely untouched by the impotent measures of the authorities.

How does Policy Paralysis of Govt & RBI Actions Affect Indian Banks ?
The recent liquidity tightening measures by RBI at least reveals the regulator’s intention to keep money supply tight. In other words though some of the measures could be reversed and short term rates which have gone up more than 300bps from the recent lows could come down, we don’t see a situation where easy money prevails, funding costs could come down and lending rates could be cut.

Mere announcements or lip service by the finance Minister Mr. P. Chidambaram doesn’t entail recovery. Cases being referred to CDR continue to remain very high. Most large assets restructured earlier aren’t performing well (implying larger defaults from restructured assets) and the “big names” in the business amounting close to Rs2trillion of debt (3% of system assets) are yet to be restructured and will come up over the course of the next few years. We expect stressed assets to touch a 14yr high of 13% by FY14.

Specifically avoid PSU banks which are very weakly capitalised. Adding to the woes of the PSU Banks is the Social Spending by Congress Government for Votes. Valuations for them are deceptively cheap and on a fully adjusted basis (for NPLs and restructuring) the PSUs are trading closer to book value compared to 0.5x P/BV on a reported basis

A weaker currency doesn’t leave much leeway for monetary easing by RBI which further exacerbates the problems. We have lost all hope. Nothing is going to happen till central government elections in April/May 2014 until this Corrupt Congress led UPA Government is thrown out of power and we are now going to be in an extended period of low growth.