Indian share markets are presently trading on a negative note. Sectoral indices are trading in the red with stocks in the banking sector and metal sector witnessing maximum selling pressure.

The BSE Sensex is trading down 154 points (down 0.5%) and the NSE Nifty is trading down 52 points (down 0.5%). The BSE Mid Cap index is trading down by 0.2%, while the BSE Small Cap index is trading down by 0.1%. The rupee is trading at 65.06 to the US dollar.

In the news from the banking sector, as per a leading financial daily, the government has ordered all state-run banks to examine non-performing loans of more than Rs 500 million for any wrongdoing similar to the Punjab National Bank (PNB) fraud.

The banks have been given 15 days to also prepare a pre-emptive action plan to address such risks.

The above development would mean investigations in high-profile bankruptcy cases that are undergoing resolution, and putting their promoters under the scanner if any scams are uncovered.

The share of large corporates, in total advances of the banking sector, has almost remained unchanged over past three years (at an average of 55%).

However, their contribution to incremental slippages has been huge. At one point, the big corporate borrowers accounted for nearly 90% of total NPAs of the sector, as can be seen from the chart below:

Big Borrowers Turning into Big Offenders

Banks, in principle, must be careful about not extending loans to borrowers with poor creditworthiness or payment track record. That too, irrespective of the size of the borrower.

While the bad loans struggle at PSBs has been going on for a decade, there are other issues that have recently cropped up adding to their pile of misery. Bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.

That’s the reason we’ve been wary of PSU banks since 2014. This was well before the market had caught a whiff of the NPA problem. We’ve recommended just two large PSU banks in StockSelect since then…and already successfully closed both of them.