India, from the end of September, and more notably, from the 1st of October, has been a one horse race: banking stocks. 

Every "performing" sector which has driven the entire rally from April,has actually been in the negative in this very period! See the list: Pharma, IT, Chemicals!

Let us try to understand whether this banking rally is logical or something else.

(This is written by a friend of ours who is an IIMA MBA and Indian Banking Veteran for past 35 years!)

Some "explanations" for the 45% increase in BankNifty since Sept 24, 2020: 

1. With moratorium until end August and loan book not adjusted as of 30/9, for all EMI (mostly retail) and demand loans, accruing interest but not recognising credit losses on actuals (self assessed provisions). 

2. Non recognition of NPAs and stopping accrual of interest on such loans as of 30/9, and for that matter, until the Supreme Court decides otherwise (which has taken over the government's mantle!). 

3. Non recognition of NPAs and losses on MSME loans from Apr 2019 and until Apr 2021, at least! 

4. Credit growth less than 6% since January and VS around 10/12 % in 2019. Less credit Growth is actually a positive!

5. No booking of expected losses on new loans booked (even just the last 2 years, although they’ve never been booked with fresh loans and not following global accounting standards). 

6. Not knowing the exact quality of restructured and to be restructured loans, until at least March end, 2021 (that’s only 180 days from Oct 1), a little more in the June quarter and the real picture will be better seen in the Sept, 2021 quarters and beyond. 

7. Just relying on banks unaudited self-made provisions (and we know how that went until Mr. Rajan tightened accounting and disclosure standards in 2015/16). 

Does the rally make sense? Or illogical? 

From the desk of 

Devina Mehra

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