India's banking stocks are down 7% this week despite a rate cut by RBI and a pause on new bad loans and bankruptcies

IndusInd Bank topped the list of Bank Nifty losers this week with a gash of nearly 20%. Pixabay
  • Bank Nifty, the index of India's top banking stocks, is down 7% for the week hours before the trading on Friday concluded.
  • IndusInd Bank topped the list of weekly losers with a cut of nearly 20%.
  • Fitch estimates that a total of ₹5.5 trillion, about 5.7% of India's total outstanding loans, may witness defaults due to the economic stress dealt by the COVID-19 pandemic.
  • The Reserve Bank of India brought the interest rates down for the fifth time in a year to 4% now, the lowest since 2000.
Bank Nifty, the index of India's top banking stocks, is down 7% for the week hours before the trading on Friday concluded. IndusInd Bank topped the list of weekly losers with a cut of nearly 20%. Shareholders of Indian banks are dumping their stock fearing a fresh surge in loan defaults as ₹2 in every ₹5 is lent to sectors like tourism, hotels, and restaurants, which are part of the medium-to-high-risk segments in the post-COVID world.

The sell-off in banking stocks escalated on Friday (May 22) despite the fifth cut in benchmark interest rates in a year by the Reserve Bank of India. The repo rate, the interest that the central bank charges for lending money to banks, is now at 4%, the lowest since 2000.

The benchmark interest rates in India have never been as low as 4% since the turn of the century.Business Insider

Not just that, the government also announced a pause on classifying loan defaults as bad loans, and initiating new insolvency cases, for the next one year due to the debilitating impact of COVID-19 pandemic on the economy. However, none of these measures were good enough for the markets.
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These are the top losers on the Bank Nifty this week:
Stock This week
IndusInd Bank-19.19%
Federal Bank-14.63%
Axis Bank-13.28%
RBL Bank-11.29%
Bank of Baroda-9.98%

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The stocks look cheap as the Bank Nifty has already lost over 46% this year so far, but as ICICI Securities put it in a report dated May 13, "valuations are tempting but the risks outweigh rewards."

Indian banks had barely cleaned up the massive pile of unpaid loans from the country’s corporates. The total non-performing assets (NPA) in India was estimated at over ₹9 lakh crore at the end of September 2019. The coronavirus pandemic is spiralling into an economic crisis that may bring a fresh wave of defauts ⁠— this time from the small borrowers.

Fitch estimates that a total of ₹5.5 trillion, about 5.7% of India's total outstanding loans, may witness defaults due to the economic stress dealt by the COVID-19 pandemic. The report also added that every government-owned bank in India will need an additional capital of ₹30,000 crore to ₹55,000 crore.

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In an exclusive chat with Business Insider on April 10, Vijay Shekhar Sharma, the billionaire founder of Alibaba-backed Paytm, said this will be the ‘biggest nightmare’ for India in 2020. With the RBI extending the moratorium on loan repayments till August 31, it is likely that more borrowers may take the option.

If more borrowers opt to defer loan repayments, it will hurt banks' earnings in the short term. They may earn interest on the prolonging of the loan tenure.Business Insider

Moreover, the chiefs of major lenders like Axis Bank and Kotak Mahindra Bank have already said that they will be more cautious while making loans hereon, and that will have an impact on future earnings of the banks too.

Even the corporate lobby says that the interest rate cuts are good, but not good enough. "...a new phenomenon is visible," ASSOCHAM Secretary General Mr Deepak Sood said. "Along with the risk aversion by the banks to lend, even the borrowers are apprehensive about increasing debts on their balance sheets in the face of a grave economic situation... Under such circumstances, restructuring of debts on a wider scale and a willingness to share the grave consequences of the global pandemic are essential."
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All in all, the business environment for banks seems to fraught with risks and investors don't have the appetite for it.

SEE ALSO:
No EMI payments for six months as RBI extends moratorium on loans repayments till August 31
Yes Bank fears more deposits may disappear when COVID-19 moratorium ends and people start repaying loans
Axis Bank CEO says lending will be 'cautious' despite easing stress from bad loans in the latest fourth quarter
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