Very clearly, this polarisation has existed for a very long time in the BFSI sector. Well-run NBFCs, that tend to deliver consistent shareholder returns, are always better priced. Investors are more than happy to pay a premium for the fact that they are predictable and are consistent in what they deliver.
What we have generally seen is because of the PSU banks and the AQR. Post AQR, due to whatever supervisory oversight that happened, PSU banks went into a contraction mode and over the last five-six years, we have been seeing 90% of the earnings accruing to private sector banks and well run NBFCs.
Very clearly, the valuation wedge that opened up between the laggards and the winners has widened that much more. We believe that will continue until in the medium term, all banks necessarily become safe banks. When that happens, there will be very little to choose for you between banks. Most of them will be delivering 1.2-1.5% ROA. It is not happening right now but that is where the banking sector will move.
Uday Kotak said there are three solutions to perhaps resolve the financial crisis — raising equity, consolidation and mortality. Which banks and NBFCs according to you could fall into these categories or perhaps look at these instruments to help the liquidity situation a little better?
If we were to start with different buckets within the BFSI universe, there would be a lot of PSU banks which do not have standalone currency to go and raise money. Obviously, they are not going to fall in bucket one where they can raise equity on their own. For them, the reality will be either to consolidate or have some element of natural mortality.
Now being a PSU bank that will not be allowed and so essentially they fall into the second bucket very clearly. There are also a lot of mid-sized smaller private sector banks which have remained small for a very long period of time and remain sub-optimal as far as ROEs are concerned. To that extent, you neither have scale nor returns. Those are the banks which probably open themselves up as M&A candidates where there could be takeover candidates or mortality.
In the Indian context, we have never seen a bank going under, to that extent I believe policy makers will never experiment allowing a bank to go under. We have already seen what happened with the global financial crisis. The inter-connectivity within the financial sector is only rising, And so to that extent, there is no possibility where you allow an institution to die. But consolidation, yes, where you move into stronger, safer hands. There are only a handful of names which can actually raise money on their own that would be the large private sector names.