While writing about Key Investment Themes for 2011-India Perspective, I had mentioned that, “We are positive on the infrastructure and banking space. If infrastructure is the favored sector with the government then it will be the banks, which will be the key financiers of the infrastructure projects. Although RBI expects credit growth to be around 20% by 2011, we are of the opinion that the figures will be higher on account of companies reviving their capital expenditure plans and higher disposable income with the masses. The credit growth as on 3 December 2010 has already reached 22%."
Four years later as I write this column, it seems like the lending to infrastructure projects has become the achilles heel to the banking sector. Here, I am referring to the public sector banks (PSBs) that are currently grappling with NPAs on account of their huge lending to the infrastructure sector. However, it seems like the government and the RBI are working in tandem to revive the banking sector which is considered to be the lifeline of the economy.
In the Financial Stability Report, June 2015, RBI’s views on the same state that “While the regulatory move towards encouraging greater market access and market discipline will help the development of domestic financial markets, the banking sector, especially the PSBs will be expected to continue to shoulder the needs of the accelerating growth in the economy. In this context, the policy initiatives for improving the governance and management processes at public sector banks become significant”. The government is also not far behind when it comes to helping PSBs to cope up with the current crisis. The government of India on August 14, 2015 launched a programme called Indradhanush, aimed at revamping PSBs not just by infusing capital, but by putting in place a robust management along with proper risk control measures.
We have always believed that if India has to achieve sustainable growth momentum, it will be the banks which will be the forerunners for this development. This is because the banking sector is the biggest financiers of CAPEX that is essential to revive the economy and put it back on the growth trajectory.
If the Central bank and the government are taking efforts to revive the PSBs, then it seems like the mutual fund industry is placing their bets heavily on the Private Sector banks. An analysis of the portfolios of the 11 banking funds
in the industry during the last 36 months (August 2012-July 2015) shows that all the banking funds except LIC NOMURA MF Banking and Financial Services Fund, have an average allocation of more than 50% in private sector banks. Funds like Religare Invesco Banking Fund and UTI Banking Sector Fund have been allocating on an average of more than 70% of their surplus in private sector banks. On the other hand, the average exposure into PSBs during this time period has been in the range of 9% to 26%. The problems faced by the PSBs in the last few years could be the reason as to why this segment is not finding a significant place in the banking fund’s portfolio. However, neglecting a crucial sector which is essential for reviving the economy in funds focusing on banks is definitely a cause of concern. We have a government which has already pulled up the private sector banks for not participating in the government promoted schemes. The government is also keen that they start financing major projects which are required for the overall development of the Indian economy. If the tide turns in that direction, the question is, will the fund managers start making changes in their portfolios with a tilt towards the PSBs?
Another interesting observation here is that, fund managers in the banking funds seem to have a lot of affinity towards two stocks namely HDFC Bank and ICICI Bank. The data points given below clearly indicate the optimism that fund managers have towards these two stocks. Here again, the point is, when these two stocks are already having a major allocation in diversified funds, why are fund managers who are managing banking funds, not diversifying into other stocks. If the explanation that is going to be given is that the funds are following benchmarks, then my answer would be that investors park surplus in actively managed funds so that fund management teams can beat the benchmarks with their prudent investment strategies.Banking funds allocation to HDFC Bank and ICICI Bank
Source: NAV India, fundsupermart compilation
*These funds were launched after August 2012.
Banking funds are a part of the portfolios of investors whose risk appetite is aggressive and who have a time horizon of more than 5 years. A sector fund considered to be crucial for the revival of the economy should have a good focus on PSBs, which are the drivers of growth in the future. Team Modi, known to be proficient with revamping PSUs will not let our public sector banks bleed. This is a fact that fund managers seem to have missed in their enthusiasm to show good returns for their funds by concentrating in the segment which is doing well and focusing on stocks that are the largest in this segment. In short, the banking sector especially the PSBs which in RBI’s words will be expected to continue to shoulder the needs of the accelerating growth in the economy should definitely be a part of banking funds. It would also be highly appreciated if fund managers can actually spot the gems in the banking space so as to balance out the concentration that currently rests with two stocks.DISCLAIMER iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.