Earnings for banks lending to corporate to be volatile


Retail and home financing offers better earning opportunity for banks as earnings for corporate lenders are expected to be volatile, said investment banking firm Jefferies.

In its latest report on the recent initiative of the central government and the Reserve Bank of India (RBI) for resolution of non-performing loans (NPL) Jefferies said: “It seems, the Government will favour legal workarounds and if required will introduce newer laws to remove road blocks. While better, such steps are almost always long drawn.”

“We think provision costs will remain elevated as haircuts will get baked in, especially for corporate assets. As a result, earnings for corporate lenders are expected to be volatile and possibly weak. Pure retail financing and home loan segment offers the best earnings visibility, in our view.”

On May 5, the central government introduced two new sections in the Banking Regulation Act.

“One of these (section 35AA) allows RBI an indirect control on corporates that are under ‘default’ by directing banks to initiate resolution through Insolvency Act. But as a last effort, RBI has eased norms under the Joint Lender Forum (JLF) to enable a resolution outside the Insolvency Act. We expect provision costs to be elevated in next twelve months for corporate lenders,” Jefferies said.

Jefferies does not agree with the view that RBI will form committees to offer haircuts to banks on their loans as a part of resolution of stressed assets/loans.

“Such committees don’t have any legal standing under the Act and their decision on haircuts as well as acceptance by banks of such haircuts doesn’t have any additional legal sanctity and can challenged by the CVC (Central Vigilance Commission) and CBI (Central Bureau of Investigation). Instead these committees will guide RBI on which assets should go for insolvency resolution, in our opinion,” Jefferies said.