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  • 5 reasons why PSU Bank shares are rallying

    It’s no secret that India’s government-owned banks have been troubled. It can be seen in the slump in the prices of PSU bank shares. In contrast, private banks tended to be the darling of investors.

    However, this trend changed in November. And it’s continuing even this month in December 2016. The Nifty PSU Bank index is up 2.2% since 8 November 2016. That was the day Prime Minister Narendra Modi announced the demonetization of 500- and 1000-rupee notes. Stocks of major Public sector lenders like SBI, Bank of India and Bank of Baroda outperformed the index. At the same time, investors sold private bank shares.

    So what’s the reason behind this change in trend? Here are 5 reasons:

  • Increase in deposits:

    No bank can run without capital. This is the money that will help the business make profits. PSU banks have been low on capital, especially because of the high number of bad loans. When borrowers fail to pay back loans, banks incur a loss. At such times, deposits by bank customers help increase the bank’s capital. With the demonetization move, cash worth lakhs and crores of rupees has been deposited in banks. The latest tally was Rs 12.44 lakh crore. This is the cheapest source of capital for banks, including PSU banks. This also means the pressure reduces on the government to infuse capital from its kitty.

  • More account openings:

    More business is always good. For banks, this means more account openings. To exchange the old 500 and 1,000 rupee notes, everyone had to deposit it first and then withdraw the money. It was not an over-the-counter exchange. As a result, many who were initially unbanked had to open new savings accounts. Banks opened around 30 lakh new accounts between November 8 and 30, as per a report by DNA, a daily newspaper. SBI alone witnessed 11.82 lakh new accounts during this time, the report stated.

  • Activating Jan Dhan accounts:

    In August 2014, Prime Minister Narendra Modi launched the Jan Dhan scheme to increase the penetration of banks in India. The idea was to attract the unbanked population into the system. While crores of new accounts were opened, most of the accounts remained idle. This was not a good sign. Now, however, only 23% of the total Jan Dhan accounts have zero balance. Moreover, deposits surged by 60% or around ` 27,000 crore to ` 72,834.72 crore in a span of 14 days, as per an Indian Express report. When the scheme was just launched, it took banks 16 months to get deposits worth ` 27,000 crore.

  • Higher CASA Ratio:

    More accounts and higher deposits in the savings accounts mean an increase in banks’ CASA ratio. CASA stands for Current And Savings Account. It measures how much of a bank’s total deposits are held in Current Accounts and Savings Accounts. These deposits are cheap sources of funds for banks as deposit rate paid on these are much lower than that in fixed deposits. So, a higher CASA ratio means lower cost for banks. This can help push up profits. Experts believe banks can see an increase in their CASA ratios because of the deposits. This is good news for the under-capitalised PSU banks. On the negative side, the RBI had sucked the excess liquidity post demonetization through 100% CRR (100% deposits received post demonetization to be held as cash reserve ratio with RBI and on which banks do not get any interest rate). This was negative for banks as though they were paying interest rate on deposits (received post demonetization) but could not earn any interest on them either through investing in bonds or loans and advances. Banks were losing money on account of this. However, since it was intended to be a temporary measure, the RBI revoked this 100% CRR requirement, much to the relief of banks.

  • Fall in interest rates:

    This is pure economics—as the supply of money increases, its price goes down. In this case, it means interest rates go down. Already banks have cut down the interest rates on Deposits. The rates now range from 5.5% to 7.6%. This means lower costs for banks. Moreover, lending rates could fall too. This is because banks now have the bandwidth to pass on RBI’s interest rate cuts. A cut in lending rates could help increase demand for loans and borrowing. This means higher profits in the future.

    • PSU bank stocks make the most of the demonetisation move Read more

    • Benefits from demonetisation not enough to shore up banks: Fitch Read more

  • 12%

    Many may feel positive about the impact of the demonetization move on PSU banks. However, the credit ratings agency Fitch Ratings continues to believe in the banks’ negative outlook. It believes that the benefits of the demonetization move are not enough to compensate for all the risks. Moreover, it expects bad loans to increase further. This can be seen in the increase in the proportion of Stressed assets—a measure of bad loans. Fitch expects the Stressed Asset Ratio of Indian banks to increase to 12% of the Total assets in 2016-17. It was 11.4% in the previous fiscal year.