RBI’s hattrick bowls out potential risks in banks

Over the past few years, the banking industry has enjoyed a favourable market sentiment, as evidenced by Bank Nifty's impressive two-year total returns from CY22 to CY23, registering a growth of 35.8%. This growth surpassed the 24% increase seen in the Nifty50 during the same period. Fortunately, this positive sentiment towards banks is not merely superficial; it is substantiated by their robust financial performance and a conducive macroeconomic environment.

Nevertheless, history has repeatedly demonstrated that neither boom nor bust is eternal, and the lending sector is no exception. Typically, the lending business exhibits cyclical patterns in asset quality. During prosperous times, lenders tend to become more aggressive, fostering a lending bubble. However, as the macroeconomic conditions deteriorate, asset quality concerns emerge, adversely affecting profitability.

Recognizing the cyclical nature of the lending business, it becomes crucial to address potential risks during favourable periods when banks have the capacity to absorb the impact of new norms. In alignment with this strategic approach, the Reserve Bank of India (RBI) has made a hat-trick of noteworthy announcements in the past two months, each targeting specific risks in the financial system.


Aim to slow down the pace of unsecured loans: The RBI has expressed concerns over the escalating share of unsecured loans in total retail lending, which has surged from 4.2% to 8% over the past five years. To temper this rapid growth and associated risks, the RBI has imposed higher risk weights on unsecured loans, aiming to moderate their proliferation.

Curbing Loan Evergreening Practices by NBFCs through AIFs: In a bid to enhance transparency and mitigate risks, the RBI has prohibited Non-Banking Financial Companies (NBFCs) from utilizing Alternative Investment Funds (AIFs) to perpetuate the evergreening of loans. If an NBFC invests in an AIF, that AIF cannot purchase bonds from companies to which the NBFC lent in the past year. If the AIF inadvertently buys such bonds, the NBFC must divest its AIF holdings within 30 days. Failure to do so requires a 100% provision on the invested amount in the AIF units.

Revamping Bank Dividend Declaration Guidelines: The RBI has introduced a revised framework governing bank dividend declaration. Under the new guidelines, dividend payouts are intricately linked to Net Non-Performing Assets (NPA). Specifically, banks can now declare dividends only when the Net NPA falls below 6%, compared to the previous threshold of 7%, thereby imposing stricter criteria for dividend distribution.

In a masterful display akin to a cricket hat-trick, the RBI's strategic announcements aim to effectively "clean bowl" potential risks in the banking sector. The RBI's vigilant approach, coupled with strategic measures addressing unsecured lending, evergreening practices, and dividend norms, underscores its effective oversight. Such proactive actions not only fortify the banking sector but also affirm the RBI's commendable role in ensuring sustainability and stability amid potential risks.

Technical Outlook:

In a weekly wrap, Nifty marked 21,834 an all-time high on 1st Jan 2024 but slid marginally lower by 0.09% and ended at 21,711.

Throughout the week the Nifty persistently attempted to break the critical resistance threshold yet each attempt turned into a sell-off.

However, consolidation in the 21,500-21,750 range sets the stage for the next breakout. The weekly support remains at 21,350 levels whereas the upper Bollinger band plots resistance around 21,950 levels.

In the previous week, Foreign Institutional Investors (FIIs) shifted their stance turning buyers with equity purchases amounting to Rs 1,593.4 crore. Conversely, Domestic Institutional Investors (DIIs) sold worth Rs 3,798.9 crore until Thursday.

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