Rise in provision by banks suggest pressure days ahead

For the past few weeks, the banking sector and financial firms are facing a large selling pressure, which is evident from the fall of nearly five per cent in Bank Nifty during the previous week.

However, during the recovery in the past few weeks, after the unprecedented fall, the banking sector has given 14 per cent returns. On the other hand, broader indices have increased by nearly 20 per cent. Even the benchmark indices, Sensex and Nifty gained in the same range.

The anticipation of higher provisioning and risk of defaults have seemed to create a pressure on the banking stocks. Axis Bank and IndusInd bank witnessed a sharp rise in the provisions at the end of the third quarter. Axis Bank’s provisions increased by nearly double while, IndusInd bank saw a spike of 56 per cent in the aforementioned provisions. Going ahead, for the current as well as the next quarter, the banks can even see a declining trend in the operational matrix such as credit growth, expansion plans etc.

The sentiment is further bad for NBFCs, which may face twin challenge of credit growth and capital requirements. Shadow banking companies having a loan exposure in the affordable housing, small and medium enterprises (MSMEs) along with microfinance, which faced a hard hit due to the lockdown. The delay in repayments and very weak capital structure would make it very hard to sustain unless there is some strong government intervention.