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Improved conditions of banks and non-banking financial companies
For the non-banking finance companies (NBFCs) including the banks and housing finance companies, the last year was difficult. Investors were also very disappointed. They were losing their trust in the financial sector.

The deepening crisis was considered to be serious. Owing to the increase non-performing assets (NPAs), rising pace of fraud and involvement of top management in frauds, shares of banking sectors were felling down in the Sensex.

The changes made in the NPA rules by the Reserve Bank of India also increased the troubles of the banks. From all these, the Nifty Bank Index fell nearly 15 per cent below the January high-level in March last year, while the non-banking financial companies (NBFCs) had to face the cash crunch after the bankruptcy of IL & FS in the September, 2018.

In order to improve the situation, the government intervened in the matter and provided some capital to the banks. The Reserve Bank also made the rules of the Prompt Corrective Action (PCA) somewhat flexible. However, some banks and NBFCs, which were listed on BSE 500, also performed well during the crisis, due to the improvement in the performance of the big banks and decrease in the intensity of cash crisis in NBFCs.

Many corporate lenders have improved their asset quality in the third quarter of December 2018; thereby reduction of NPAs could be possible. In the coming days, the financial condition of the banks is expected to improve further due to the decline in NPAs and improved pace of recovery. In the third quarter of fiscal year 2019, Axis Bank and ICICI Bank's gross NPAs declined 102 to 109 basis points compared to March, 2018.

According to Macquarie analysts, public sector banks and private lenders are likely to get normalized borrowing costs and in the next two years it is expected to reach 100 basis points from 160 to 190 basis points. For the public sector banks and private lenders, the borrowing cost reached 420 basis points in the year 2018. According to experts, due to improved borrowing cost and expected recovery, margins may be improved by 20 to 50 basis points by 2021. According to Macquarie, the public sector banks have suffered more losses than private banks, due to the merger of large banks with weak and small banks, agricultural debt waivers, decrease of shareholding in market share etc.

According to Chokalkalingam, Managing Director of Equinomics Research and Advisory, the situation is getting favorable for public sector banks. Chokalkingam says that the public sector banks have started to reduce their NPAs. Due to changed scenario, evolution of shares of public sector banks is good in the market.

Some public sector banks, such as Allahabad Bank, Corporation Bank, Bank of Maharashtra, have recently been excluded from the RBI's PCA framework, thereby creating an atmosphere of enthusiasm in the market. It is being speculated that public sector banks will now improve their growth rates, because in the context of branch expansion and borrowing, they will not have to comply with strict PCA guidelines. However, due to the lack of incremental capital and slow investment cycle, the credit growth of banks may be affected.

Retail NPA is not a big concern, but corporate asset quality is very important, which banks are constantly trying to improve. The banks are steadily performing well in retail borrowing business. Consumption has increased and fresh reduction in commodity and service tax (GST) on residential properties under construction has improved the investment scenario. This is a good sign for HDFC Bank and other banks. The improvement in the situation of public sector banks and recovery of NBFCs to some extent from the cash crisis is helping lenders increase market share. The popularity of gold finance lenders and Government-owned financial companies, such as PFCs and private banks like REC and HDFC, are increasing popularity among investors.

It is clear from the scrutiny that corrective action by the government and corrective efforts by banks, housing finance companies and NBFC is improving in the financial sector, thereby increasing the chances of a recovery in the economy.

About the author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of merinews.com. In case you have a opposing view, please click here to share the same in the comments section.
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