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Last Updated : Oct 16, 2015 05:48 PM IST | Source: CNBC-TV18

The forex scam is not the big threat for banks. This is...

Bank stocks may take a stick from the market today, after the Enforcement Directorate said it was investigating a whole host of banks in a scam that involved funnelling out Rs 557 crore from the country.

Bank stocks may take a stick from the market today, after the Enforcement Directorate said it was investigating a whole host of banks in a scam that involved funnelling out Rs 557 crore from the country.

But Parag Jariwala, VP - Institutional Research, Religare Capital Markets, said the fraud appears to be "employee-related" rather than institutional and that the developments related to it will likely not have a huge impact on bank profits and thereby shares.

"I don't think this is going to be material [from a stock standpoint]," he told CNBC-TV18 in an interview.

There's a bigger worry for some banks -- the smaller ones.

DCB Bank shares have tanked about 35 percent in two days after its management announced a mega expansion plan citing rising competitive pressure [and the arrival of institutions such as payment banks]. The impending balance sheet stress resulting out of the expansion spooked the market.

"There is definitely a threat to small private sector or mid-tier public banks. They are completely not aware that payment banks can take away their CASA," he said.

"There will be lot of changes. But things are not yet clear so the bank that is over-reacting, people don't want to own that stock," he added.

Below is the verbatim transcript of Parag Jariwala’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: As I see it, I am unhappy as a citizen that somebody is not paying the tax or laundering money but there is no risk to the P&L of these banks, is there?

A: Not materially. First of all we need to distinguish between employee related frauds and something which bank is liable to. The way in which the newspapers are reporting, it more looks like a employee related fraud and not much from the part of the banks.

So, in terms of fee income it can also happen that lot of forex income which used to get generated because of this money transferring from India to abroad and vice-versa or whatever it is, that may take a knock but it won’t be a big proportion of the banks P&L.

Sonia: Just to put this a little more simply, investors who own these stocks, the likes of Oriental Bank of Commerce (OBC), etc should not be worried about this particular scam and they should still hold on to them if they are in it for the long-term?

A: I don't think it is going to be something very material. Mainly banks have their checks and balances in place. So, to my mind maximum penalty under money laundering for lapse in the documentations and etc if there is no fraud then it is Rs 10 lakh and Rs 15 lakh in the first round; it is completely manageable.

Latha: We noticed yesterday DCB Bank fell another 15 percent; that stock has lost some 30-40 percent in the last three days but what did DCB tell us at the investors meet that I see competition from small banks, I see competition from payment banks and so I am increasing my point of sale, my branches. Now, if DCB has to be sold for that reason why is the market not attacking Karnataka Bank, why is it not attacking Lakshmi Vilas Bank (LVB), why is it not attacking Karur Vysya, Federal Bank or any of the smaller banks, everybody is in the same space isn't it?

A: Yes, everybody is in the same space but the point is market is kind of penalising the one who is acting very aggressively. We haven’t seen such kind of action from Karur Vysya Bank, Lakshmi Vilas Bank or any other bank you pointed out. There is definitely a threat, I think even why not small private sector banks but even the mid-tier PSU banks like Andhra Bank, Indian Overseas Bank, Indian Bank or some small bank, they are completely not aware that payment bank can take over their entire current and savings account (CASA) in next three to six months.

So, there will be a lot of changes. I agree because a lot of things are still not very clear so people are kind of waiting and watching. Somebody who is over reacting, people don’t want to own those stocks.

Sonia: How much do you think the cost to income ratio for DCB Bank will go up now because of this massive expansion and what is your target price on the stock?

A: We don’t cover this stock so we can’t comment on that.

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First Published on Oct 16, 2015 08:46 am
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