Why FIIs are Selling Bank and Finance Sector Stocks?

Introduction:

In July 2021, Foreign Institutional Investors have sold around $1.5 Billion of their allocation in Banks and Finance Sector Stocks. In Indian Rupee terms, the total value amounts to Rs. 11,000 Cr. What are the reasons behind the selling mindset of the FIIs, know the same in this short article.

Reasons:

i) Effect of Second Wave of Covid-19:

• Due to the dangerous second wave of Covid-19 in the country, the collection efficiencies of Banking, NBFCs, and Finance Companies are being highly impacted.
• Due to the impact on the Collection Efficiencies of these companies, the stress then turns out in kind of NPAs for these companies.
• This can be one of the major reasons for the lowering down of the stake of FIIs in these stocks.

ii) Muted Disbursement:

• The Disbursement figure of Banking, NBFCs, and Finance Companies are quite muted in the first quarter of FY22.
• The reasons for the same were the lockdowns and hindrances to the day-to-day operations of these companies.

iii) No Relief from RBI:

• During the first wave of Covid-19 in the country, the Reserve Bank of India (RBI) provided the Moratorium facility for around 6 months from April 2020 to September 2020.
• But during the second wave of Covid-19, RBI has not provided any kind of relief like Moratorium or others, and hence there are chances of creation of more NPAs to these companies.

iv) Increasing Slippages:

• 2 Big Banks of India- State Bank of India (SBI) and ICICI Bank have reported a high spike in the slippages.
• For Q1FY22, the slippages amount of SBI was around Rs. 16,300 Cr. whereas ICICI reported slippages of around Rs. 7,200 Cr.

vi) RBI Indications:

• Reserve Bank of India has indicated that stress risk can increase by 2.3% to 3.7%.
• Normally, the stress-risk level provided by the RBI covering all the banking companies/operations was around 7.5%, but now it has increased up to 9.8% to 11.2%.
• This rise in percentage will surely have an impact on the total NPAs of all the banks.

Allocation of FIIs:

• The allocation of Foreign Institutional Investors (FIIs) in the Banking and Finance Sector Stocks was around 36%-37% during November and December 2020 which has gradually come down to 31.5% between January 2021-July 2021
• This fall in stake of FIIs and FPIs is a clear indication that there can be stress on the banks and financial sector stocks.

Conclusion:

At this point, one should stick with the banks having a high capital adequacy ratio, strong liability franchise should be on the radar of any investor. Consult a financial advisor before making any investment decisions.