The Fund was again active making two new purchases. Following announcements from the government late last month over public sector bank recapitalisation we have made a slight change in focus. We have added the first public sector bank for many years, buying the State Bank of India: the best positioned and undisputed leader of the pack. We expect to hear continued news flow from the government to clear the lingering non-performing loan (NPL) issues that public sector banks in particular and corporate banks in general have been suffering. While resolving the NPL problems will undoubtedly take further time, we believe that from a risk/reward perspective having exposure to specific public sector and corporate banks looks compelling.
We are now hopeful that the road to a final clean-up of India’s banks is much clearer. The NPL issue has been a key factor holding back growth over the last few years, albeit not the only one. The recapitalisation is a significant move that cannot be underestimated, although we expect further actions from the government in the months ahead. What is clear however is that we have already seen a pick-up in bank credit growth over the last couple of months. While that is too short a period to extrapolate a trend, we do believe that we are on the cusp of a revival in bank credit growth which should benefit the corporate lenders relatively better than the much higher rated consumer facing banks. For that reason we will be favouring banks and corporate banks in the period ahead.
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