For banks, is investing in stocks more risky than lending for NPAs? 

Nov 25 2013, 09:32 IST
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SummaryWith the field loaded so clearly for the borrowers is it any wonder debt is a far more attractive option even if technically equity is cheaper?

With the field loaded so clearly for the borrowers is it any wonder debt is a far more attractive option even if technically equity is cheaper?

There is an increasingly apocalyptic tone among the regulators about the rising bad loans of public sector banks. The tone has worsened after the SBI and the next four showed in their quarterly results that their bad loans are not falling any time soon.

But in this environment, the one institution that is doing well is another public sector institution, the Life Insurance Corporation. A big chunk of LIC’s wellness has got to do with its investment in the stock market. But to make this connection work for the Indian banks too, is impossible to conceive.

Without this connection life remains pleasant for Indian business houses. Most of them are extremely reluctant to tap the equity markets to raise finance. It is because Sebi rules are non-discretionary and the level of transparency required via the three-monthly result regimens makes obfuscation difficult. Look at Lanco, for instance.

But there are few rules for raising debt from banks. Since this is not promoter money, if the loan goes down the tube only the banks suffer. With the field loaded so clearly for the borrowers is it any wonder debt is a far more attractive option even if technically equity is cheaper?

It also helps that there is an RBI set limit on aggregate exposure of a bank to the capital markets in all forms which says it should not exceed 40 per cent of the banks’ net worth at the end of the previous year. The limit has rationale but introduced in Dr Reddy’s time in 2007, smart bank chiefs learnt it was meant to discourage than just provide a limit. Few banks walk this path using it only as a residual investment option and instead preferring to buy government papers and offer loans instead.

RBI and the finance ministry never tire of advising the banks to insist that promoters of companies should bring more of their equity in the game. Promoters can laugh it off however saying the equity market is so thin they cannot raise money from there.

If banks were to instead buy more equity even within their current limits the volume of liquidity in the markets would expand rapidly. It will also force more companies to use this route to raise funds since banks will have a

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