Indian shares fell on Monday as banking and financial stocks dragged the market lower amid concerns over rising bad loans and regulatory uncertainties. The benchmark BSE Sensex closed down 0.8% at 58,177.76, while the broader NSE Nifty ended 0.9% lower at 17,355.30.
Banking stocks under pressure
The banking sector was the worst performer on Monday, as investors worried about the impact of the second wave of COVID-19 on asset quality and loan growth. The Nifty Bank index fell 1.7%, with HDFC Bank, ICICI Bank and Axis Bank among the top losers.
The Reserve Bank of India (RBI) has extended the deadline for banks to implement a new framework for bad loan recognition and resolution till October 31, 2023. The framework, which was supposed to come into effect from April 1, 2021, requires banks to classify loans as non-performing if they are overdue by more than 30 days, and to initiate resolution plans within 180 days of default.
Some analysts believe that the extension of the deadline could delay the recognition and resolution of stressed assets, and create uncertainty for investors. “The extension of the timeline for the implementation of the new framework is a negative for the banking sector, as it implies that the asset quality issues are not yet resolved and there could be more slippages and provisions in the coming quarters,” said Abhishek Jain, an analyst at HDFC Securities.
Financial stocks also drag
The financial sector also faced selling pressure on Monday, as the RBI announced new guidelines for non-banking financial companies (NBFCs) and housing finance companies (HFCs) to prevent concentration risks and improve governance. The RBI said that NBFCs and HFCs with assets of more than Rs 50,000 crore will have to appoint a chief risk officer, limit their exposure to group entities and related parties, and diversify their funding sources.
The RBI also said that it will issue a discussion paper on the regulation of NBFCs and HFCs by December 2023, which will propose a scale-based approach to supervision and regulation. The RBI said that the scale-based approach will take into account the systemic significance, complexity and interconnectedness of NBFCs and HFCs, and will aim to reduce arbitrage and ensure a level playing field with banks.
The Nifty Financial Services index fell 1.4%, with Bajaj Finance, HDFC and Kotak Mahindra Bank among the major decliners. Some analysts said that the new guidelines could increase the compliance costs and operational challenges for NBFCs and HFCs, and affect their profitability and growth prospects. “The new guidelines are aimed at improving the risk management and governance practices of NBFCs and HFCs, but they could also have a negative impact on their margins and return on equity, as they will have to adhere to stricter norms and diversify their funding sources,” said Rajeev Singh, an analyst at Motilal Oswal Financial Services.
Other factors weigh on sentiment
Apart from the banking and financial sectors, the market sentiment was also dampened by other factors, such as the rising crude oil prices, the weak global cues and the lack of positive triggers. The Brent crude oil price rose above $85 per barrel on Monday, as supply disruptions and strong demand boosted the outlook for the commodity. The high oil prices could increase the inflationary pressures and the current account deficit for India, which imports more than 80% of its oil needs.
The global markets were also subdued on Monday, as investors awaited the earnings season and the policy decisions from the US Federal Reserve and the European Central Bank later this week. The US Fed is expected to announce the tapering of its bond-buying program, while the ECB is likely to maintain its accommodative stance. The market participants are also concerned about the impact of the energy crisis, the supply chain disruptions and the inflationary pressures on the global economic recovery.
The domestic market also lacked any positive triggers, as the earnings season has been mixed so far, and the festive season demand has been muted due to the pandemic. The market is also awaiting the outcome of the state elections in Uttar Pradesh, Punjab, Goa, Manipur and Uttarakhand, which are scheduled for early next year. The results of these elections could have a bearing on the political stability and the reform agenda of the central government.