"The banks' profitability would have been better if they were not made to implement schemes such as the Jan Dhan Yojana or were compelled to open more branches in rural areas. Such schemes bring considerable strain on human resources without generating any profit. Besides, bad loans of corporates add to banks' burden."
According to Deven Choksey, this is the time to buy with a long-term view in mind. "Buy and hold for at least three years and make sure you hold some cash to pump in during market corrections," say Choksey.
It is pertinent to mention here that credit demand has paled to 10.5% against 14.5% a year ago. In the absence of demand for loans, banks have been parking their surplus funds in government bonds. Analysts estimate that banks have parked close to 28% of their deposits in government bonds, against the 22% mandated by the RBI.
The move to reduce rates may also enable banks to post better profits, thereby easing pressure on the government for capital. "Some banks may be under pressure to show profits. Higher earnings will enable banks to plough back profits to shore up their tier-I capital," said Vaibhav Agarwal, research analyst at Angel Broking.