PNB’s Rs 11,400 crore fraud has sent jitters across the banking system already reeling under the pressure of burgeoning NPAs, and across the benchmark equity indices struggling as a fallout of LTCG and global sell-off. The scam has raised concerns over the effectiveness of the government’s massive bank recap plan, and over the resilience of the banking sector to cope with RBI’s revised framework on NPAs, when the core structural governance issues remain unsolved. The fraud reminds one about the mistake of ignoring genuine structural governance reforms at PSU banks, says Saurabh Mukherjea, CEO, Ambit Capital. As for stock markets, even while valuations look rich, equities remain the best bet for investors, but one must remain invested for long term, Saurabh Mukherjea, whose book “Coffee Can Investing: The Low-Risk Road to Stupendous Wealth” is scheduled to be launched later this week on 23 February, said in an interview with Ashish Pandey of FE Online. Here are the edited excerpts:
What is your take on RBI’s revised framework for banks on NPAs? How will it help or disrupt the banking sector and, in turn, the economy?
The new framework is stricter in terms of timelines and asset classification and provisioning norms. It puts in place an automatic mechanism for reference of large NPAs to insolvency filing. It will accelerate transition from stressed standard loans to NPAs during coming six months, leading to concentrated provisioning. Emphasis on consortium based resolution raises risks even for private sector bank’s corporate books. In long-run, however, economy benefits from abolition of regulatory forbearance and enforcement of time-bound and co-ordinated resolution.
Will the banks’ capital adequacy ratio be impacted in any way? Will it have any impact on the government’s recapitalisation programme?
Most PSU banks are thin on capital and provision buffers. Thus, concentrated provisioning will hurt banks’ earnings and their capital ratios. The government will thus have to bring forward its recap program and may have to enlarge it.
Days after RBI announced revised framework to deal with mounting NPAs, Rs 11,400 crore PNB fraud has cropped up. What kind of spillover effect will PNB scam have on rest of the economy especially the banking sector?
At a time, when government’s prime focus was cleaning-up and recapitalizing PSU banks to have them in a better shape to fund economic recovery, the PNB fraud reminds folly of side-stepping genuine structural governance reforms at PSU banks. In absence of these reforms, PSU banking system will remain the weak link in driving any sustained economic recovery.
Post big sell-off that markets witnessed in the last few weeks, what is your outlook for various market segments in the short term, and what about mid term?
As highlighted in my new book “Coffee Can Investing: the low risk road to stupendous wealth”, it is not a clever idea to invest in the Indian stock market with a horizon less than three years. This point is even more relevant today at a juncture when valuations of Indian stocks look rich. For those who are willing to invest in high quality Indian stocks and then sit patiently for at least five years, ideally ten years, our Coffee Can Portfolio is ideal. This consists entirely of companies whose revenues have grown at at least 10% per annum over the past decade alongside 15% ROCE.
What are the further downside triggers, if any, for the markets from here?
The Indian market, and more generally, global equities will be very sensitive to rising US bond yields. If the US 10 year bond yield goes through 3% then we could have a bigger correction on our hands. The bond yield in turn will be driven by oil prices and wage hikes in the US.
Is it the right time for the fence sitters to get into the market, or should they wait more?
I have never fully understood who the fence sitters are. If you are a patient person who can put money at work and sit back then the stock market can help you get richer. If you are more excitable then you are better off not going near the market.
Is the introduction of LTCG going to spook long term investors, especially foreign institutions?
I reckon there will be some selling pressure on the market as we approach the end of the Financial Year.
Where should domestic small investors put their money now?
Most of us should consider having a portfolio spread across high quality long term compounders (the formula for identifying these has been laid out in the book), large cap tracker funds, small cap mutual funds, liquid fund and government bonds. A well-constructed can give annualized returns in the high teens provided you keep transaction costs and fees low.
With the LTCG, and the outlook on equities not encouraging, is debt a good option for them?
Debt has its place in the portfolio but only a limited context. Given how high inflation is for middle class people in India, most of us need to keep most of our wealth in equities.