The backbone of India’s financial sector is getting its strength back. Banks, battling low credit demand and rising bad loans, have been given a few booster shots in the last couple of months.
　　One, Parliament cleared a Bill that will lead to the setting up of new banks. Two, on January 29, the Reserve Bank of India, or RBI, lowered the rate at which it lends to banks by 25 basis points or bps. To top it all, the government’s efforts over the last few months to boost growth are likely to increase the demand for credit and improve banks’ asset quality.
　　In anticipation, the sector’s stocks have been doing better than the overall market (See Bankex Vs Sensex) for the last few months.
　　 BILL BOOST
　　The RBI is expected to expedite the process of issuing bank licences after the banking Bill becomes a law, says Vaibhav Agrawal, VP, research banking, Angel Broking.
　　Another trigger for the stock rally is a proposal in the Bill to increase voting rights from 1% to 10% in case of public sector banks and 10% to 26% in case of private banks. This has improved investor sentiment, says Saday Sinha, banking analyst, Kotak Securities.
　　“This will benefit private sector banks such as Kotak Mahindra Bank, Yes Bank and ING Vysya Bank where promoter holding is more than 10%,” says Vinay Khattar, head of research (individual clients), Edelweiss Financial Services Ltd.
　　 NEW BANKS
　　Experts say the entry of new banks is likely to attract foreign funds into the sector. “Apart from bringing tougher competition, new banks will increase the acquisition prospects of older private banks,”says Agrawal. This is, in fact, the main reason for the recent rise in shares of these banks.
　　“In this space, South Indian Bank looks attractive, as it is trading at a reasonable valuation compared to other older private sector banks and has decent fundamentals,” he says. “Stocks of other older banks that one can consider for gaining from a possible acquisition are Federal Bank and Karur Vysya Bank,” says Agrawal.
　　However, Rajat Rajgarhia, director, research, Motilal Oswal Financial Services, feels that this may be a time-consuming process and take another 12-15 months.
　　 RATE RELIEF
　　Edelweiss’ Khattar says the worst is behind us on the macroeconomic front, and with the RBI cutting interest rates, economic growth will in all likelihood pick up. After keeping the repo rate unchanged since April 2012, the RBI, in its thirdquarter review of the monetary policy, slashed it by 25 bps to 7.75%. It also cut the cash reserve ratio, the proportion of funds banks have to keep with it, by 25 bps to 4% (See Interest Rates).

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