Four of the top five performers on BSE Sensex on Tuesday were from the BFS industry while Nifty Bank and Nifty Financial Services rallied.

The loan moratorium extended by banks and non-banking financial institutions has been termed by many as being one of the biggest risks that the banking and financial services industry is staring at in the near future. The same was reiterated by rating agency Moody’s yesterday and earlier last week by Fitch as well. Both sounded the alarm bells cautioning that the situation at Indian banks could be much worse than what was perceived earlier. However, share markets are not mirroring the fear. Four of the top five performers on BSE Sensex on Tuesday were from the BFS industry while Nifty Bank and Nifty Financial Services rallied.

“Stock market is feeling that there is more action which the government might come up with, that is why these stocks have come up,” Abhimanyu Sofat, Head of Research IIFL Securities told Financial Express Online. Bajaj Finance was the top gainer on BSE Sensex surging 8%, followed by Kotak Mahindra Bank, up 7.5%. IndusInd Bank and HDFC were the other top gainers on Sensex. Financials have continued their upwards trajectory with Nifty Bank gaining 17% in the last one week and Nifty Financial Service surging close to 18% in the same period. 

On Tuesday Moody’s followed its rating action on India’s sovereign rating by downgrading key banking institutions like HDFC Bank and State Bank of India, along with Export-Import Bank. “If you look from the asset side then private banks contribute only ~35% of the banking system and remaining bare public sector banks.  Public sector banks continued to trade at multi-year lows. Only selected private banks are trading at relatively higher levels,” Asutosh Mishra, Head of Research – Institutional Equity at Ashika Stock Broking said.

According to Fitch Ratings, the latest set of measures announced by the Reserve Bank of India that includes an extension of the 90-day moratorium, along with additional relaxations in bank lending limits including allowing banks to fund interest on working-capital loans could pose asset-quality challenges “These measures will put a heavy onus, particularly on state banks to bail out the affected sectors, due to their quasi-policy role, considering that much of the state’s recently announced stimulus measures is in the form of new loans,” Fitch said. On the other hand Moody’s said that persistent stress among banks and non-bank financial institutions (NBFIs) weighs on growth dynamics through constrained supply of credit for consumption and investment. Moody’s does not expect the credit crunch in India’s undercapitalized financial sector to be resolved quickly. 

While experts say that the comments made by Moody’s or Fitch are not entirely wrong. “The points raised by Fitch and Moodys are not wrong, we are in a tight fiscal spot,” Abhimanyu Sofat said. “If you have forex reserves you have put it in US Treasuries, domestically you are paying 6%-7% for debt so why not borrow money at something around 1% from international markets instead of yourself deploying such heavy cost forex reserves at minimal return. Today we are nowhere, so the government has to focus on growth and stabilise the economy and forget what these agencies are saying,” he added. Sofat said that the movement in the banking sector has also been helped by global equity markets that are largely stable.