PSU banks' rally might snap if actions fail to meet expectations: Dhananjay Sinha

Under its so-called Indradhanush programme, the government will infuse Rs70,000 crore in state banks over four years while they will have to raise a further Rs1.1 trillion from the markets to meet their capital requirements in line with global Basel III risk norms

But, right now, nobody knows what the new package looks like and I think it (solution) would be closer to the Bad Bank concept as enumerated in the last economic survey, he said.

The concept of a bad bank is similar to a regular bank, but the only difference is that it buys non-performing assets at market price from other banks and in the process, the bank clears their balance sheet of toxic assets.

When asked about the valuation of private and public sector banks, Sinha is of the view that there is a certain degree of impairment risk. “If we do a haircut, the residual capital with PSU banks will be very low compared to that of private sector banks.

“If I consider the cyclical upturn or significant revival in corporate trending private sector banks would still have capital even after taking a considerable haircut. We like private corporate banks which benefit from growth story,” he said.

Commenting on the MFI industry, Sinha said that the impairment risk would also impact microfinance companies. Across India, there are a lot of asset quality issues related to MFIs.