Your investments are for the long term. You need to put that hard-earned money into investments that also help you beat inflation. When you are ready to invest, it means you have enough money to look for your daily expenses. That is the money you do not need right now. If you have managed to create a monthly surplus and are looking for long-term opportunities, your banks offer much more than just the fixed deposit, where you have most of your idle money.
Stocks of banks in India’s financial sector shares are a good option for those seeking long-term wealth creation. While you may want professional advice for specific stocks, broad indicators show much promise for wealth creation. The first simple reason for that assumption is that for India to become a developed country by 2047, it needs more than two large banks. Currently, HDFC Bank and SBI are the biggest banks in India. A recent speech by Michael D Patra, deputy governor of the Reserve Bank of India, listed many other opportunities for the attractiveness of India’s financial sector. As an investor, you need to connect the dots and create an adequate knowledge base before you invest. The speech was published on the RBI website and has some valuable observations that show the state of the financial sector in India.
A few years ago, banks’ asset quality was under the weather, with non-performing loans surging. That means they had a significant percentage of loans on books that did not generate interest income or repayment from borrowers. Such a situation makes it difficult for banks to lend money. It caused a slowdown in the economy in 2019, a year ahead of the lockdown. The phase after the COVID-19 pandemic pulled everything down. Banks also had weaker net interest income and net interest margins, determining bank profitability.
The government intervened at the right time. Between 2017 and 2022, a $42 billion infusion in the recapitalisation of banks brought the percentage of non-performing assets down to manageable levels. Besides strengthening lending rules, the government ensured that banks did not fail and there was no panic. The Reserve Bank of India has kept a close oversight on banks and conducts regular stress tests to estimate the damage to balance sheets. Banks have adequate capital resources in reserves to deal with any potential credit risks, according to the results of those stress tests.
“Macro stress tests for credit risk reveal that all banks in India would be able to comply with the minimum capital requirements even under severe stress scenarios,” he told his audience at a seminar in Cambodia. You have a situation where bank balance sheets are the strongest than they were before. The non-performing loans in the banking system are at manageable levels. Most banks are growing their interest income and profits steadily. From an investment perspective, there can be no better time to push your savings into investments that pay for your retirement. Share prices of banks have underperformed other asset classes. The Nifty Midcap index is up 149% over the past five years, while the Nifty IT index is up 107%. The benchmark Nifty 50 has also outperformed the Nifty Bank index in that phase.
Most of you have money in banks or fixed deposits. However, if you wish to create long-term wealth that beats inflation, you should own some banking sector stocks or an index fund based on the Nifty Bank index in your portfolio. You need to determine the right stocks by looking at their strength on the balance sheet. RBI regularly releases a lot of data that will allow you to track the credit growth in the economy. At the same time, banks announce quarterly financial results that give insights into the rural and urban markets.
There is a significant boom in retail loans as people spend money on consumer items, travel and festive expenditure. Rapid growth in retail loans poses risks, but RBI is prepared. “Prudence is taking precedence over-exuberance, and this is reflected in the steady build-up of all types of buffers,” the RBI deputy governor said. That should reassure you.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)