PSU banks make the most of demonetisation move

PRIME Minister Narendra Modi historic November 8 demonitization move might have shaken the entire nation, but there was one sector that was making the most of it. The public sector banks. The shares of public-sector banks have emerged the major gainers from demonetisation. At a time when benchmark indices have declined about 5 percent, major state-owned banks’ stock prices have moved up 6-22 per cent.
Thus, the Union Bank of India stock...
has gained 21 percent since November 8, when Prime Minister Narendra Modi announced the decision to demonetise Rs 500 and Rs 1,000 currency notes. Another PSU bank Bank of Baroda gained 18.6 percent, Bank of India with 11.4 percent, while Canara Bank and State Bank of India have registered 10 percent increase in their stocks.
This is a good news for the PSU banks that have been reeling under mounting pressure from bad loans.
However, the private banks have a different story to tell as their stocks have plummeted.
This is because the reach of PSU banks in India's hinterland has given them an edge. In rural areas, people tend to keep much more cash holdings than their urban counterparts and obviously such banks are witnessing high deposits at their branches. This is not only going to help them have higher deposits but also better their current and savings account, or Casa, ratio.
According to public-sector bank executives, the huge flow of deposits will bring down the cost of funds. As a consequence, banks will have room to cut lending rates as well, helping support demand for credit in the next few quarters. However, the demand for loans might dip in the near term as businesses and people grapple with the adverse effects of demonetisation. As much as Rs 5 lakh crore has already come into bank deposits since November 10. Even after taking into account the withdrawal and use of money in regular business, most of the funds would remain with banks, said a senior executive with Indian Banks’ Association.
In the long-term, more cash-based business activities would come into the banking system, said a State Bank of India executive. SBI’s tally of low-cost deposits was 42.74 per cent at the end of September 2016.
SBI chairman Arundhati Bhattacharya had recently said that such deposits from smaller customers would not move out of the system in a hurry. This is why state banks are currently the favourite among investors. The top six public sector lenders have nearly 45,000 branches across the country. SBI leads with 17,000 branches spread across the length and breadth of the country followed by Punjab National Bank and Bank of Baroda. On the other hand, all the major private banks put together have lesser number of branches than that of SBI.