Growing uncertainty about the quantum of bad loans that plagues India’s public sector banks (PSBs) rocked the stock markets on Thursday with Sensex, the barometer of the Bombay Stock Exchange, losing over 800 points (3.4%) making investors poorer by over 3 lakh crore. The markets failed to gain the lost ground on Friday. While announcing its third quarter result, the State Bank of India, India’s largest lender, reported setting aside about Rs 8,000 crore in the December quarter to wipe out some of its bad loans. The results of the other nationalised banks are similarly pathetic which would impact the credit growth in the banks-dependent economy. “Obviously the bad health of our public sector lenders, considered as the lifeline of the Indian economy, scared the investors who are already facing anxious moments triggered by the ongoing global economic slowdown,” says Sunil Sinha, principal economist, India Ratings and Research.
The Sensex had lost over 12% of its value so far this year and is down by over 23% since its peak of 30,000 level reached in early 2015. Though stocks weakened elsewhere as well, the reaction of the Indian market was too sharp. As far as the problem of bad loans is concerned, the December quarter result is not the end of the story. “The results strongly indicate that there is more pain in store,” says Sinha. He adds that the mania of mindless lending done by them in the past is expected to haunt them in the upcoming quarters as well. Though investors had anticipated some provisioning by PSBs but the actual numbers overwhelmed their approximation.
Most of the financial intermediation in India happens through banks especially through PSBs that roughly has about 70% share in India’s banking space.
If such a huge and critical component of the Indian economy is suffering, it obviously raises question about the banks’ ability to fund India’s growth story. The legislative logjam in Parliament has already made investors cautious about India’s growth prospects. Analysts say that with the slowdown in the second largest economy, China, the volatility bouts are expected to become even more frequent keeping investors anxious for the better part of 2016. And, as the risk appetite fluctuates, so will the capital inflows which means that the pressure on the rupee is going to remain.
Foreign Institutional Investors (FIIs) had already withdrawn over Rs14,000 crore from the Indian stock markets so far this year thereby weakening the rupee by 3.5% in the same period.