The short term recovery in our equity markets that brought the Nifty close to the 8000 mark, failed to sustain as Financial sector outlook remained uncertain. Nifty did make a smart come back from the levels of 6825 touched on the budget day, but the status-quo announced by Bank of Japan (BOJ) on quantitative easing took the wind out of the markets. On the other hand, weakening of the dollar (after taking ques from BOJ) stretched the rally in gold as the precious metal traded close to the 1300$/ ounce mark. We have seen a sharp decline in global equity markets towards the end of the month. Our markets have other issues to digest beyond the weak global signals.
The most important question for our markets is the Health of our Financial sector. The dilemma before the analysts is to decide whether the declaration of bad loans in the balance sheets of Banks (responding to the dictat of the Central Bank), and the corresponding hit on the bottom line, a positive development or it should be treated as alarm bell for the health of the Financial sector. As at the end of December 2015 the gross NPAs of 39 listed entities of the banking sector amounted to over Rs.4.38 trillion. And a staggering Rs.6 trillion is classified in the categories SMA 1 & 2, a portion of which will definitely find its way to the NPA category over the next financial year.
To add to the woes of the Banking sector is the alarming situation existing vis-a-vis NBFCs (there are over 11000 NBFCs registered with RBI). As per RBI's report on NBFCs, where the norms for NPAs are less stringent as compared to banks, they have 3.5% bad assets on their books. The sectors contributing towards the stress assets are: Infrastructure, Steel & Power to name a few.
With the economic revival still at least 2-3 quarters away, the stress on the books of Financial sector companies is only going to escalate before it begins to decline. Given the acute drought situation prevailing in the country, something more that an above normal monsoon will be needed to help the Financial sector overcome its current set of woes. The equity markets have perhaps sensed the alarming situation, and are likely to remain subdued in the immediate future. A marked improvement in the market fortunes is linked to a meaningful turn-around in the health of the Financial sector.
