Why is the banking sector in a bad shape? 

RRR (Raghu Ram Rajan) has surely shaken up the banking sector. I heard that routine matters that would take 4 minutes are now taking 45 minutes at the BOARD level instead of being disposed off by the MD. Fairly everybody is here to protect his backside, so wants to play safe. Our bankers will NEVER, EVER be penalised for sitting on money and doing nothing, but they could attract the CBI if they made a mistake lending money to a chaiwala.

The Banking business in India is closely linked to what the government wants, so they cannot lend to say retail trade. However the same bank with all its limitations will be happy (or forced?) to lend to Infra projects like roads, telecommunications, etc. Obviously most bankers lack the ability or brain power to lend to infra, metals, and other big industries. However based on their understanding and some old archaic documents and calculations they do lend big amounts. Then they wonder what they have done. See JSPL.

Bankers used the ‘politician’ cloak to make clandestine money and that has also cost the banking system a big packet. The banking system in its ‘we want to do everything’ syndrome have KILLED the private sector players in leasing, hire purchase, factoring, operational and financial leases, and of course they did not want a retail market develop in bonds. So India does not have a decent secondary market in bonds – for the wholesale guy or for the retail guy. This is really tragic because it means that infra projects had to be funded by banks. Your asset purchases, working capital purchases, new projects – were all funded by a banking system without much analytical skills.

The worst may be yet to come. Our ‘home loan’ market and the ‘educational loan’ market are the holy cows about which nobody is talking. However the home loan market seems to have a lot of skeletons in terms of the 20% down payment kinda loans which are given to the builder. Securitisation, quality of the builder’s balance sheet, quality of construction, job security of the borrower, –  all factors seem to be questionable. The new Real Estate bill will see a huge, huge shakeout and the small builder will soon be laid waste. Once his business is threatened will the builder be too keen to repay his debt?

Are the PSU bank shares worth investing in at this stage? Well let us look at the top – SBI and Bank of Baroda. Well, the cleaning has STARTED for sure, but is the cleaning over? I have my doubts. Strong doubts. If the loan giving process or procedure remains the same, the question to ask is

‘will further creation of NPA be avoided?’

Is there an incentive for the bank manager to give credit at all ?

Will they encash their Real Estate all over the country?

Will they be allowed to come out with another VRS and let people go?

Will they attract new talent to attract new customers?

Will they change their attitude?

Will the people who got them into a mess be the ones to clean it up (it has never happened in history)?

Will they grow at a rocking 24% p.a. to support the ‘grow in India’ story well enough?

Will they participate in the ‘India Growth story?

Will the GoI keep dumping shares worth Rs. 5000 crores ever year?

Will they have a good Roce and Roe?

Will the NPA post cleaning be really insignificant?

How much will hair cut really happen?

Will the new process improve the PE of the banks in general and psu banks in particular?

Will the bank subsidiaries continue to sell toxic products using the bank’s reach and goodwill?

Will the market believe that the RE deals of selling unwanted properties be clean and overboard?

Many of these questions have to be answered before one can decide to buy.

What is the hurry?