HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and State Bank of India (SBI) contributed the most to indices' losses.
Bank stocks fell as much 10 per cent in Monday’ weak trade as the government announced that no fresh insolvency cases under Insolvency and Bankruptcy Code (IBC) will be initiated for up to one year. IndusInd Bank share price tanked 10 per cent to Rs 376.95 apiece, while ICICI Bank shares tumbled 9 per cent to Rs 293.50 per equity. HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and State Bank of India (SBI) contributed the most to indices’ losses. SBI share price was down 6 per cent while HDFC Bank and Kotak Mahindra Bank were down 5 per cent each. “We believe that this will be a setback for banks looking for resolution/liquidation under the legal umbrella, with no risk of witch-hunting later on and more so when another wave of corporate NPAs could be on way,” Emkay Global Financial Services said in its latest research report.
Under IBC related matters, FM Sitharaman said many businesses have been severely affected by lockdown. The debts related to coronavirus shall be excluded from defaults under IBC. Also, the minimum threshold to initiate insolvency proceedings has been raised to Rs 1 crore from Rs 1 lakh. Moreover, no fresh insolvency proceeding will be initiated up to one year. “Suspension of IBC proceedings for one year though essential in these times, would postpone the pain for Banks and NBFCs and they could see large slippages and lower recoveries post the 1 year period,” said Dhiraj Relli, MD & CEO, HDFC Securities.
“Amid demand from IBA for a ‘Bad Bank’, the government has been silent for now and which we believe will be difficult to come by,” the research and brokerage firm said. “With little help from an economic package focused on long term reforms, banks have to defend themselves from asset quality storm,” it further added. The brokerage firm recommended investors to stick with select banks which have strong capital or provisioning buffers and healthy core profitability to absorb the shocks induced by coronavirus. “We believe that bellwether HDFC Bank offers a safe harbor at current valuations, with a proven track record to manage asset quality disruptions and emerge strongly as the cycle normalizes,” it added.
The proposal to increase the threshold limit to initiate proceedings under IBC, exclusion of default due to COVID-19 and barring initiation of new insolvency cases for next 1 year “will surely benefit corporate entities who genuinely want to pull themselves out of an economic slowdown but will ultimately hamper the recovery prospects of financial institutions in cases of existing defaults by a corporate entity and in those cases as well where the accounts have already been declared as NPAs,” a corporate lawyer Sumit Batra said.