Behold what PNB hath wrought

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The Nifty PSU Bank Index has been beaten black and blue, punished mainly for the scam that broke at state-owned lender Punjab National Bank (PNB).

Prior to that, the Reserve Bank of India’s revised framework on bad loans had already raised concerns on prolonging the non-performing asset cycle and higher provisioning for public sector banks.

As Chart 1 shows, a cocktail of these developments has soured market sentiment, taking a toll on the Nifty as well. But of course, the PSU Bank index has done far worse.

No one was spared. As Chart 2 shows, mid-caps and small-caps, which otherwise have been outperformers, fell in tandem with the benchmark index.

Consequently, in February so far, India underperformed South-East Asian peers like Indonesia, Thailand and Malaysia. However, the Indian equities market has performed better than China’s, while we’re more or less level with South Korea (see Chart 3).

Now that the sentiment towards Indian public sector banks has turned fickle, the PNB management’s commentary on recovery of funds will be closely watched.

As the noose tightens on other public sector banks as well, businesses might find it difficult to borrow funds from state-owned lenders. On the other hand, this could be an opportunity for private sector banks and non-banking financial companies to gain market share.

According to some analysts, while the Nifty may not immediately fall below the 10,000 level, market participants should beware the Ides of March. One should brace for increased volatility given the fact that the long-term capital gains tax will start from 1 April. And of course, there are also risks emanating from movements in crude oil prices, bond yields and the tightening of monetary policy in international markets.livemint