The counters in the banking hall of the state-owned Punjab National Bank stand empty during a strike by bank employees in New Delhi, India. (Photographer: Sondeep Shankar/Bloomberg News)

Nilesh Shah Sees Selective Good Bets Among Financials

Investors will find good investment bets among banks and non-bank lenders despite India’s bad loan problem, but they should be selective.

That’s the advice from Nilesh Shah, managing director at Kotak Asset Management Company. While non-bank lenders and retail-focused private banks are available at higher valuations, their growth path is very clear, Shah told BloombergQuint in an interview. Also, there may be an opportunity in corporate-focused private banks and some of the public sector lenders, he said.

The advice from Shah comes even as bad loans at a number of public-sector banks rose in the quarter ended March after the Reserve Bank of India withdrew existing stressed asset schemes and asked banks to re-classify these accounts as non-performing assets if debt restructuring is yet to be completed. Some of them are also under prompt corrective action that places restrictions on lenders whose operational and financial metrics are weak.

Also read: What Happens When A Bank Stops Lending?

That’s where non-bank and retail focussed private banks are at an advantage, according to Shah. They have abundant capital or can raise funds from the market while the rest of their peers don’t have enough capital to lend, Shah said. “Lack of competition is giving them huge opportunity to grow and which is why they are available at higher valuations.”

For corporate focussed private banks and state-owned lenders not under the prompt corrective action, power sector will contribute more bad loans over the next two quarter, Shah said. Their non-performing assets should then bottom out, he said, providing a “good opportunity to invest”.

Other highlights of the conversation with Nilesh Shah:

  • Increase in crude oil prices a worry for India.
  • State and central governments, oil marketing companies, explorers and consumers have to share the burden of crude price hike.
  • Oil price and 2019 general elections will have far bigger impact on Indian markets than an increase in U.S. interest rates or tariff wars.
  • High real interest rates depressing profitability of Indian companies.
  • Overvalued currency allowed Chinese companies to dump goods in India.
  • Rising inflation is closing the gap on real interest rates in India.