Jain added that incremental bad loans into the banking sector will be fewer than earlier
Private life insurance company Canara HSBC OBC Life Insurance expects an improvement in the non-performing assets (NPA) situation in the banking sector and believes the worst is over. In an interaction with Moneycontrol, Anurag Jain, Chief Investment Officer, Canara HSBC OBC Life Insurance talked about the investment strategy.
Q: After the Reserve Bank of India (RBI) raised repo rates in August, do you expect a prolonged pause?
A: Crude continues to move up, rupee continues to depreciate and commodity prices are also high. While RBI has hiked rates, they have actually been following the curve.
But the market rates have moved higher than the RBI rates. If there is a sharp increase in inflation, it is likely that they will increase rates.
While a lot of it has happened, in a regular interest rate cycle rates do not move so sharply. So, there will be a pause for a while. But it is likely that RBI may do another rate hike in this financial year since core inflation continues to remain high.
Q: Do you see a revival in the corporate bond market?
A: Right now because of rates moving up, we aren’t seeing too many issuances in the corporate bond market. It has significantly dried up and I believe that good issues will take time to hit the market.
Q: Are you open to Infrastructure Investment Trusts (InvITs) as a new investment instrument?
A: We are not too positive on InvITS because there aren’t too many good issues on offer. We want assets that can feed us for a longer duration. We are waiting for better issues.
Meanwhile, we have Alternative Investment Funds (AIFs). The only challenge is the RBI only allows 3 percent spread across five AIFs and it is not adequate.
Q: In the equity market, do you view banks as an attractive opportunity?
A: Banks are highly leveraged institutions. Considering the segment they operate it, they will be more volatile. We look to invest in much more stable banks like retail banks and private sector banks which have a healthy balance sheet.
But if you look at the market as a whole, the earnings growth is very patchy in the market. If you look at the region. India is slightly expensive than the others and there is a chance that the foreign institutional investors could re-allocate to other markets.
Q: But aren’t the high non-performing assets (NPAs) in the sector a cause of concern?
A: NPAs have peaked out and new formation of NPAs are much lower than earlier. The first quarter results also reflected the fact that the gross NPAs of banks have come down.
While provisions will remain elevated, gross NPAs will come down and net NPAs will come down faster. Also, if we see more resolutions under the Insolvency and Bankruptcy Code (IBC), there could be some write-backs happening and some NPAs will move to the standard asset category.Following this, the credit cost will normalise. Worst is clearly behind in terms of new bad asset formation. In due course, operating profit will go up and provisions will slowly come down. We are seeing some uptick in credit growth as well. This will pave the way for good earnings growth for the large corporate banks over the next few years.