Monthly Insight February 2018

Transcription

1 Monthly Insight February 218

2 1 P a g e February Indian Economy Economic Releases in February-218 Policy Rates Period Actual Previous Repo Rate^ 28-Feb-18 6.% 6.% Reverse Repo^ 28-Feb % 5.75% CRR^ 28-Feb-18 4.% 4.% Key Indicators Actual Previous Index Of Industrial Production (IIP) Wholesale Price Index Inflation(WPI) Export (Y-o-Y) Import (Y-o-Y) Current Account Deficit ($ Billions) Fiscal Deficit FYTD (INR Trillion) 7.1%(Dec-17) 2.84%(Jan-18) 9.7%(Jan-18) 26.1%(Jan-18) -7.2(Sep-17) 6.77 (Jan-18) 8.8%(Nov-17) 3.58%(Dec-17) 12.36%(Dec-17) 21.12%(Dec-17) -14.3(Jun-17) 6.21 (Dec-17) Source: RBI, Thomson Reuters Eikon; ^Based on RBI Bi-monthly Monetary Policy Statement on 7- Feb-218 Growth ( in %) Monthly WPI Movement -4. Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: Office of the Economic Adviser, Ministry of Commerce & Industry Growth (In%) Source: MOSPI Dec-16 Apr-17 Aug-17 Dec-17 IIP (%MoM) IIP Movement IIP (%YoY) India s Gross Domestic Product (GDP) grew 7.2% YoY in the third quarter of FY18, better than upwardly revised growth of 6.5% (6.3% originally reported) in the previous quarter driven by pick up in manufacturing and spending. On Gross Value Added (GVA) basis, the economy rose 6.7%, better than upwardly revised growth of 6.2% (6.1% originally reported) rise in the quarter ended Sep 217. Manufacturing output at GVA basic prices rose 8.1% in the Dec quarter, up from downwardly revised growth of 6.9% (7.% originally reported) in Sep quarter. On the other hand, agriculture, forestry & fishing output at GVA prices increased 4.1%, faster than upwardly revised 2.7% (2.3% originally reported) expansion in the previous quarter. The Monetary Policy Committee (MPC) in its sixth bimonthly policy review kept key policy repo rate unchanged at 6.% and also retained its neutral stance. Consequently, the reverse repo rate stood unaltered at 5.75%, and the marginal standing facility (MSF) rate and bank rate each remained at 6.25%. Five policymakers were in favour of the monetary policy decision and one advocated for a policy rate increase of 25 bps. The Consumer Price Index (CPI)-based inflation grew 5.7% in Jan 218, down from 5.21% in the previous month and up from 3.17% in the same month of the previous year. Retail inflation growth thus surpassed the Central Bank's mediumterm target of 4% for the third consecutive month. India s Index of Industrial Production (IIP) grew 7.1% in Dec 217 as against upwardly revised growth of 8.8% in Nov 217 (8.4% originally reported) and 2.4% in the same period of the previous year. The manufacturing sector also surged 8.4% in Dec 217 from.6% in the same period of the previous year. However, IIP growth for Apr to Dec 217 slowed to 3.7% from 5.1% in the same period of the previous fiscal. Growth (In %) Source: MOSPI WPI & CPI Movement over last 1-year Jan-17 May-17 Sep-17 Jan-18 WPI CPI India s Wholesale Price Index (WPI)-based inflation eased to a six-month low of 2.84% in Jan 218 from 3.58% in Dec 217 and 4.26% in Jan 217. Inflation on food articles slowed to 3.% in Jan 218, from 4.72% in Dec 217. India s export during the month of Jan 218 increased 9.7% YoY to $24.38 billion from $22.36 billion in Jan 217. Similarly, import grew 26.1% YoY to $4.68 billion from $32.26 billion in the same period of the previous year. Trade deficit widened to $16.3 billion during the period, which is the highest since Jun 213, as against $9.9 billion in Jan 217.

3 2 P a g e February Indian Equity Market Index PE Ratio & Returns* Closing Values # 1 Year 3 Year 5 Year Nifty 5 1, Nifty 5 PE S&P BSE Sensex 34, S&P BSE Sensex PE Source: NSE, BSE, * Returns less than 1 year are absolute, greater than 1 year are Compounded Annualized, # As on 28-Feb % -8.62% -.41% -1.31% -1.64% -1.91% -3.7% -3.15% -4.15% -4.29% -4.62% -4.85% -4.85% -4.95% -5.27% -5.39% -5.74% -6.32% -12% -8% -4% % Source: MFI Explorer In Rs. 2,7 1,8 9 S&P BSE IT S&P BSE Teck S&P BSE Metal S&P BSE FMCG S&P BSE Health care S&P BSE Small cap S&P BSE Power S&P BSE Auto S&P BSE Mid cap Nifty 5 S&P BSE1 S&P BSE Sensex S&P BSE Oil & Gas S&P BSE Realty S&P BSE Consumer Durables S&P BSE Capital Goods S&P BSE PSU S&P BSE Bankex Growth of Rs 1, over Last 1-Yrs Feb-8 Feb-1 Feb-12 Feb-14 Feb-16 Feb-18 S&P BSE Mid cap S&P BSE Sensex S&P BSE Small cap Source : MFI Explorer P/E - S&P BSE Sensex, Nifty 5, Nifty Midcap Monthly returns as on February 28, 218 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Source : Thomson Reuters Eikon, NSE Domestic Benchmark Indices Trailing P/E Nifty 5 Nifty Midcap 5 S&P BSE Sensex The Union Budget played a pivotal role during the month under review and domestic equity markets witnessed major fall as investors closely followed developments on the implementation of budget proposals. The finance minister raising the fiscal deficit target for FY19 and levying 1% long-term capital gains (LTCG) tax on gains above Rs. 1 lakh from equity had a detrimental effect on investor sentiment. Worries over probable rate hike by the MPC and a major state-owned bank s fraudulent and unauthorised transactions also set the markets back. Additionally, concerns that the U.S. Federal Reserve (Fed) might raise interest rates in its Mar 218 meeting dented market sentiment. However, upbeat economic data limited the fall. During the month, key benchmark indices S&P BSE Sensex and Nifty 5 fell 4.95% and 4.85% to close at 34,184.4 and 1,492.85, respectively. Meanwhile, S&P BSE Mid-Cap and S&P BSE Small-Cap declined 4.62% and 3.15%, respectively. Initially, Indian equity markets witnessed heavy fall as investors closely followed developments on the implementation of Budget proposals, especially, fiscal deficit target. The finance minister raised the fiscal deficit target for FY18 to 3.5% of GDP as against 3.2% earlier. The target for FY19 has been fixed at 3.3% as against previous target of 3%. Also, government s proposal of levying 1% LTCG tax on gains above Rs. 1 lakh from equity weighed on market sentiment. Announcement by a major credit rating agency that high debt burden of the government constrains India's rating upgrade further affected buying interest. Later, market sentiment dented after a major state-owned bank detected fraudulent and unauthorised transactions at one of its branches in Mumbai. Investors became wary of the long-term impact of the bank s fraudulent transaction case as some of the other public-sector banks too had exposure to the banking scam. Additionally, the state-owned bank disclosed that the amount of fraudulent transactions could be approximately Rs. 13 billion, which is higher than estimated. Furthermore, inflation concerns muted buying interest as retail inflation grew 5.7% in Jan 218, down from 5.21% MoM and up from 3.17% YoY. Retail inflation growth has surpassed the Central Bank's medium-term target of 4% for the third consecutive month. Concerns over fiscal deficit also played a spoilsport after India's fiscal deficit during Apr to Jan 218 came in at 113.7% of the budgeted target for FY18.

4 3 P a g e February Net Investment by FII/FPI & DII in Rs. Cr. 2, ,2 35,3 34,4-2,6 33,5 1-Feb-18 1-Feb Feb Feb-18 FII/FPI Net investment DII Net investment S&P BSE Sensex Source: MFI Explorer Net Investment by FII/FPI & DII in Rs. Cr. 33, 15, -3, FII, DII Investment & Sensex - February 218 FII/FPI, DII Net Investment & Sensex Movement in last 12 Mths -21, 28, FII/FPI Net investment DII Net investment S&P BSE Sensex 37, 34, 31, S&P BSE Sensex Index value S&P BSE Sensex Index value However, some respite was seen following better than expected economic data as IIP grew in Dec 217 while WPI-based inflation eased to a six-month low in Jan 218. India s GDP also posted better than expecetd growth in the third quarter of FY18 and the index of eight core industries also grew in Jan. On the global front, U.S. policymakers' effort to end a brief government shutdown until Mar 23 brought some relief. But, speculation over imminent rate hike by the U.S. Fed in its Mar 218 meeting kept market participants wary. On the BSE sectoral front, all the major indices closed in the red. S&P BSE Bankex was the major loser followed by S&P BSE PSU and S&P BSE Capital Goods sectors. The banking sector was impacted by fraudulent transaction in a major PSU bank and on announcement by the finance ministry of a 15-day deadline to state-run banks to take pre-emptive action, identify and address operational and technological risks. Source: MFI Explorer Regulatory Update The Securities and Exchange Board of India (SEBI) asked fund houses to prominently disclose the total expense ratio (TER), on daily basis, for all schemes under a separate head, "Total Expense ratio", on their websites. The disclosure will increase transparency in mutual fund schemes and make them more investor friendly. The Central Bank scrapped several loan restructuring programmes prevalent among banks to restructure defaulted loans. Almost all the schemes such as the Corporate Debt Restructuring, Sustainable Structuring of Stressed Assets or S4A, Strategic Debt Restructuring, and Flexible Structuring of Existing Long-Term Project Loans have been abolished by the Central Bank. Also, the bank has made resolution of defaults time bound with the Insolvency and Bankruptcy Code becoming the main tool to deal with defaulters. MPC decided to remove the currently applicable loan limits of Rs. 5 million and Rs. 1 million per borrower to Micro, Small and Medium Enterprises (Services) for classification under priority sector. Hence, all bank loans to MSMEs, that are engaged in providing services as defined in terms of investment in equipment under Micro, Small and Medium Enterprises Development (MSMED) Act, 26, shall qualify under priority sector without any credit caps. Government granted infrastructure status to affordable housing. This would allow these projects to avail benefits such as lower borrowing rates, tax concessions and increased flow of foreign and private capital. The government has made several efforts to create enabling environment and ecosystem to promote affordable housing. This announcement comes as a part of such effort. The Insolvency and Bankruptcy Board of India (IBBI) revised its guidelines, thereby delegating more responsibilities on the resolution professional and with stricter time lines. IBBI has directed the resolution professional to provide evaluation matrix to prospective resolution applicants and appoint two registered valuers to arrive at liquidation value and fair value of the company. The Central Bank raised the forex futures trading limit to $1 million. It expects that increase in the upper limit would lure business away from regional financial hubs as it is expected to boost daily trading volumes on domestic exchanges. The move will also create arbitrage opportunity between onshore and offshore markets. SEBI permitted the National Stock Exchange and Bombay Stock Exchange to trade in cross currency derivatives. The move is expected to help increase liquidity in the market and thereby expand scope for currency futures and options market. Source : Reuters

5 4 P a g e February Indian Fixed Income Key Rates (%) Reverse Repo Rate Repo Rate CRR SLR Bank Rate Debt Indicators (Yield %) Call Rate FBIL 1 Mn Term Mibor 1-Yr Benchmark Bond 91-Day T-Bill # 182- Day T-Bill # 364-Day T-Bill # RBI Policy Rates Current^ ^Based on RBI Bi-monthly Monetary Policy Statement on 7-Feb-218 Feb-18 Previous Jan % 5.92% 6.41% 6.36% 7.73% 7.43% 6.37% 6.35% 6.5% 6.43% 6.63% 6.54% # Indicates Monthly Average cut off during Auction Source: RBI Yield (In %) Source: CCIL Yield (In %) Yield (In %) Yr Benchmark Bond Yield India Yield Curve Shift (Y-o-Y) 1 Yr 5 Yr 1 Yr 2 Yr 3 Yr Change in bps Feb-18 Feb-17 India Yield Curve Shift (M-o-M) 1 Yr 5 Yr 1 Yr 2 Yr 3 Yr Change in bps Feb-18 Jan Change in bps Change in bps Bond yields surged for the seventh consecutive month after the government widened its fiscal deficit target for FY19. Yields further rose following rise in the U.S. Treasury yields. However, losses were trimmed as the MPC meeting was less hawkish than feared by investors. Value buying restricted yields to some extent. Yield on the 1-year benchmark bond (7.17% GS 228) jumped 3 bps to close at 7.73% from the previous month s close of 7.43%. Bond yields moved within a wide range of 7.4% to 7.82%. Bond yields soared on the first day of Feb 218 after the government in the Union Budget widened its fiscal deficit aim to 3.3% for FY19 compared with the previous target of 3%. Investors were also concerned that greater rural spending will increase inflation. Later, losses started recovering amid news that the Central Bank may conduct open market as well as secondary market purchases of debt. Yields fell further on reports that the government is in discussion with the Central Bank to raise foreign investment limit in government debt. Lower than scheduled debt sale in FY18 amid high yields and fall in international crude oil prices also boosted sentiment. Most of the losses were recovered as MPC at its sixth policy meeting was less hawkish than feared by investors. Also, no clarity on future rate hike by MPC soothed investors nerves. According to MPC, inflation is expected in the range of 5.1%- 5.6% in the first half of FY19, including diminishing statistical HRA impact of Central government employees, and in the range of 4.5%-4.6% in the second half, with risks tilted to the upside. Yields started rising again amid fresh supply of state government debt and following rise in U.S. Treasury yields. Yields continued to increase as minutes of the latest MPC meeting showed that members were concerned about rising inflation, thereby increasing the possibility of rate-hike in the near term. However, losses were restricted to some extent due to value buying. At the end, yields closed at higher levels amid sharp fall in rupee and gains in U.S. Treasury yields due to U.S. Fed chairman s indication of rate hike.

6 5 P a g e February Call Rate (In %) Repo, Reverse Repo, CRR, SLR & Bank Rate (In %) Source: RBI In bps Movements of Key Policy Rates in India Feb-8 Feb-1 Feb-12 Feb-14 Feb-16 Feb Reverse Repo Repo CRR Bank Rate SLR 5 Year Corporate Bond Spread (for AAA & AA bonds) 1 AAA Bond Spread (in bps) In bps , Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Call Rate Net Borrowings AA Bond Spread (in bps) 1 Year Corporate Bond Spread (for AAA & AA bonds) Liquidity Monitor - Call Rate and Net Borrowings AAA Bond Spread (in bps) 14, 8, 2, AA Bond Spread (in bps) LAF (In Rs. Cr.) SLR (In %) On the liquidity front, the interbank liquidity surplus decreased during the month under review. The overnight call rate traded below the policy repo rate for most of the month that ranged from 5.63% to 6.%, which reflected that liquidity remained at comfortable levels during the month under review. Banks net average lending to the Central Bank through the LAF window fell to Rs. 8, crore in Feb 218 from the previous month s average lending of Rs. 14,984.5 crore. Banks average borrowings under the Marginal Standing Facility (MSF) window increased to Rs crore in from the previous month s average borrowing of Rs crore. To absorb excess liquidity from the banking sector, the Central Bank conducted variable reverse repo auctions of various tenors. Average net absorption of liquidity through variable repo rate and reverse repo auctions stood at Rs. 2, crore in Feb 218 compared with net lending of Rs. 9, crore in Jan 218. After considering the entire gamut of LAF, MSF, term repo auction, reverse repo auction, open market operations and market stabilization scheme, the average net absorption of liquidity fell to Rs. 1, crore in Feb from Rs. 24,12.46 crore in Jan. The Central Bank conducted auctions of 91-, 182-, and 364- days Treasury Bills for a notified amount of Rs. 56, crore in Feb 218 compared with Rs. 55, crore in the previous month. The cut-off yield stood in the range of 6.36% to 6.66% during the month under review. The Central Bank also conducted auction of state development loans for a total notified amount of Rs. 54,425 crore compared with the previous month when the total notified amount was Rs. 29,82 crore. The accepted amount stood at Rs. 45,46 crore and the cut-off yield ranged from 7.56% to 8.37%. The Central Bank also conducted auctions of three government securities for a notified amount of Rs. 22, crore for which Rs. 11, crore were accepted. The cut-off price ranged from Rs to Rs , while the cut-off yield ranged from 7.7% to 7.48%. Yield on gilt securities surged across maturities in the range of 4 to 36 bps. Highest rise was seen on 1-year paper while lowest increase was on 1- and 2-year papers. Yield on corporate bonds also jumped across maturities in the range of 19 to 4 bps. Highest rise was seen on 15-year paper while lowest increase was on 4-year paper. Difference in spread between AAA corporate bond and gilt expanded across segments in the range of 3 to 21 bps. Spread rose the most on 2-year paper and the least on 1-year paper.

7 6 P a g e February INR/1 USD INR/1 EURO INR/1 GBP INR/ 1 YEN Source: RBI Commodities Currency Movement of Major Currencies (Denominated in Indian Rupee) Value(as of 28-Feb- 1 Mth 3 Mths 1 Year Currency 218) Ago Ago Ago Performance of various Commodities Returns (in %) Value(as of 28-Feb-218) 1 Wk Ago 1 Mth Ago 6 Mths Ago 1 Year Ago Crude Brent ($/Barrel) Gold ($/Oz) 1, Gold (Rs./1 gm) 3, Silver ($/Oz) Silver (Rs./Kg) 38, , MCX In U.S.Dollar Rupee per Dollar Source: RBI Commodity Rupee Versus Dollar during the year 7 Source:Thomson Reuters Eikon Movement of Commodity Prices Over 1 Year (Rebased to 1) Gold (US$) Silver (US$) Brent Crude INR The rupee initially fell against the greenback following losses in the domestic equity market after the government widened its fiscal deficit aim for FY19. Indication of a rate hike by the Fed in the near term also weighed on market sentiment. The rupee fell further amid reports that approval norms might be tightened for firms borrowing funds offshore. Losses were extended after minutes of the Fed s monetary policy review in Jan 218 showed inclination towards faster rate hikes this year amid hopes of stronger U.S. economic growth. Euro The euro rose initially against the greenback after eurozone's manufacturing Purchasing Managers' Index (PMI) rose to its highest level in over 2 years in Jan 218. However, the trend reversed following upbeat U.S. services sector PMI data for the same month. Losses in the euro retreated to some extent as market participants remained concerned over the rising U.S. fiscal deficit due to high government spending and large corporate tax cuts, which weakened the greenback. The euro fell further against the greenback in the latter half of the month after the new U.S. Fed chief hinted at a faster pace of rate hikes in 218. Crude Brent crude prices remained weak amid persisting worries over global supply glut. Also, Organization of the Petroleum Exporting Countries (OPEC) member Iran announced plans to raise its production within the next four years by at least 7, barrels a day. Nonetheless, oil prices continued to get underlying support from the growing endeavours of OPEC and non-opec members towards curbing supply glut by means of production cut. However, oil prices could not hold on to gains amid worries over rise in U.S. crude oil production, which in turn may diminish OPEC s efforts at curbing global crude oil supply. The International Energy Agency (IEA) predicted that the U.S. will surpass Russia as the world s biggest oil producer by 219, if not sooner. Gold Gold prices were initially hit as optimism over the health of the U.S. labour market contributed to the speculation of a rate hike by the U.S. Fed in its upcoming meeting in Mar 218. Concerns over U.S. government shutdown, which initially supported the safe haven appeal of the precious metal, was subsequently eased after the U.S. Congress leaders reached a two-year budget deal to raise government spending by almost $3 billion. Towards the end, the bullion was hit as the new U.S. Fed chief s first testimony raised speculations that the central bank may raise rates more than the three times currently being anticipated, although he stressed on not prejudging the new set of projections.

8 7 P a g e February Global Equity Market Performance of Major International Markets (as on February 28,218) Indices Country 1 Mth United States Nasdaq 1 S&P 5 U.S. U.S DJ Industrial Average U.S Asia Pacific SET IDX JSX Composite FTSE Straits Times Thailand Indonesia Singapore KOSPI Hang Seng S. Korea Hong Kong NIKKEI 225 Japan Shanghai SE Composite S&P BSE Sensex S&P/ASX 2 China India Australia Europe FTSE 1 CAC 4 U.K. France FSE DAX Germany Source: MFI Explorer & Thomson Reuters Eikon Global Fixed Income - U.S. United States U.S. markets witnessed initial selling pressure amid concerns over rising inflation and speculation over imminent rate hike by the U.S. Fed in its Mar policy meeting. Mixed economic data could not provide much support. However, the downturn was restricted as worries over political deadlock eased to some extent after the U.S. President signed a stopgap funding measure. Later, markets fell after the new U.S. Fed chief s comment raised speculation that the central bank may raise rates more than market expectations. Europe Weakness in Wall Street and second phase of Brexit talks weighed on European markets. Sentiment dampened further as official data showed that the nation s economy grew lower than estimated in the fourth quarter and on possibility that Fed may be more aggressive in hiking interest rates during the year. However, downside was limited as investors took positive cues from GDP data of Germany and the eurozone. Asia Asian markets took cues from weak global peers and falling crude oil prices. Speculation over imminent rate hike by the U.S. Fed raised concerns over foreign fund outflow from emerging markets. Positive economic data and expectations over easing monetary policy in Japan also helped sentiment. Yield (In %) Month 3 Months U.S. Treasury Yield Curve Shift (M-o-M) 6 Months 1 Year Change in bps 28-Feb Jan-18 Yield ( In %) Years 3 Years Years U.S. 1 Year Treasury Yield 7 Years 1 Years 3 Years Change in bps Movement during the Month Yield on the 1-year U.S. Treasury bond surged 15 bps during the month to close at 2.87% compared with the previous month s close of 2.72%. The paper moved in a range of 2.77% to 2.94%. U.S. Treasury prices fell as data showed better than expected non-farm payroll data along with the biggest annual wage increase since 29 in Jan 218. Improving risk appetite diminished the safe-haven appeal of U.S. debt that can be attributed to strong U.S. economic growth prospects. Losses were extended after data showed that U.S. consumer prices rose more than expected in Jan posting their biggest gain in a year, thereby increasing the possibility of a faster pace of interest rate hikes. Also, statement by the new chief of the U.S. Fed that central bank might raise key short-term borrowing costs four times in 218, higher than currently being anticipated, added to the losses. However, losses were capped as a volatile equity market prompted investors to purchase less risky bonds. Also, some investors were reluctant to sell the U.S. Treasury bonds until they see signs of stabilization. Further, weak domestic new home sales for Jan 218 supported bond demand.

9 8 P a g e February Investment Classroom Recapitalisation Government s recapitalisation plan for banks Recapitalisation comes into the picture when things aren t going right within a company. It refers to putting in fresh capital to improve the financial health of a company. Capital is the money invested by shareholders in a business. With regards to state-run banks, the onus of injecting the capital falls on the government as it has the majority stakeholder. The financial health of a bank is in bad state when its liabilities are higher than the assets. The government can infuse capital either by buying new shares or by issuing bonds. The plan In October 217, the government announced capital infusion of Rs lakh crore in public sector banks -Re-capitalisation bonds worth Rs lakh crore would be floated and Rs. 58, crore will be raised from the market by diluting government stake. Details: The program is a part of the government s Indradhanus plan that laid out Rs. 7, crore to be given to banks over a period of four years ending March 219. Six banks are under the prompt corrective action of Reserve Bank of India (RBI) -- Bank of India, IDBI Bank, UCO Bank, Central Bank of India, Bank of Maharashtra and Dena Bank. These banks will get capital through preferential issue of shares: UCO Bank will get Rs. 1,375 crore; Central Bank of India Rs. 323 crore; Bank of India Rs. 2,257 crore, IDBI Bank Rs. 2,729 crore, Bank of Maharashtra Rs. 65 crore and Dena Bank will receive Rs. 243 crore. State Bank of India will get Rs. 8,8 crore, while the second-biggest state-run lender Punjab National Bank will get Rs. 5,5 crore. The government-issued recapitalisation bonds will be subscribed by banks and entered as an investment in their books. This money raised by the government through these bonds will go back to banks as capital. This will boost the banks balance sheets by way of improved capitaladequacy. Recapitalisation is being supported by corrective measures by the banks management and employees. Government is signing a triparty memorandum of understanding with bank management and employee unions. The recapitalisation plan has been made performance-based, unlike till when it was need-based. Return on assets is being used as the basic criteria for capital infusion. Why banks need it Indian state-run banks have been reeling under Non-Performing Assets (NPAs) for quite some time now. Their NPAs have increased to Rs lakh crore as of Sep 217 from Rs. 1.5 lakh crore in Mar 213. The reasons behind this dismal position of banks are various, such as -- lending aggressively during good market conditions, negligence in credit risk appraisal and loan monitoring, wilful default or loan frauds in some cases, and slowdown in the global economy. This casts a dark shadow on the Indian banking and financial sector and creates a bad image globally, which inadvertently affects business. For instance, India was ranked fifth on the list of countries with highest NPAs, with top spot among the BRICS nations, by a reputed rating report. How will it help the sector/economy The drive will rejuvenate the banking sector banks will be able to extend fresh credits and increase private investments, which will mitigate the stressed asset problem to some extent. As the government is not putting the money from the state exchequer, it does not have an immediate impact on fiscal deficit. Being a long-term debt, the plan will give time to banks to increase their credit and private investment and thus improve their balance sheets. Once things get better, the government can sell the bank equities purchased earlier and retire the debt. Making the plan performance-based will push banks to pull up their socks and get their act together. Though one cannot rule out frauds, the government s efforts at making banks take pre-emptive actions, identify and address operational and technological risks, will go long way in improving the performance and image of the sector.

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