You would have heard how Indian banks have been burdened with mounting NPAs, with some of them even having governance issues and some like Yes Bank and Lakshmi Vilas Bank failing in recent. But stocks of banks in recent have joined the bull rally of India’s stock market. Did you know there is a separate index, called Bank Nifty to measure performance of banking stocks. Well, unsurprisingly it is rising too. But why? Let’s find out.
Crux of the Matter
What is the Bank Nifty?
It is an index constituting the most liquid and powerful banking stocks in the Indian stock market. Comprising of a maximum of 12 companies, the index was launched on 15th September 2003. Banking Financial Services & Insurance (BFSI) stocks comprise of 15-20% of the free-float weight in NSE. This means movement in these stocks has a larger impact on the index, making Nifty Bank a powerful index.
Eligibility Criteria For A Bank To Be A Part Of Bank Nifty Index
- Company should be part of the Banking Sector.
- Company should be part of the Nifty 500 on the day of review.
- The company should be listed for a minimum of 6 months.
- The company should also be trading in the Futures and Options (F&O) segment.
- A company that has come up with an IPO and is meeting the eligibility criteria for a period of 3 months instead of 6 months is eligible.
- The free-float market capitalisation (shares that are held by the public excluding promoter holding) of the company will be done finally.
- Weight of the stock on the index is calculated on free float basis in a way that no single stock will have more than 33% weight on the index and the top three will not have more than 62%.
On 13 June 2005, Nifty Bank entered the Future and Options segment, which increased its liquidity volatility. It is one of the other two sectoral indices that is traded in the Futures & Options market, which makes it more liquid than other indices. The current lot size (order size) of Bank Nifty F&O is 25.
Nifty Bank suffered one of its deepest fall in March 2020. Global markets were already falling as a result of uncertainty due to Covid-19. In the same period, India’s 5th largest private bank, Yes Bank failed to meet capital requirements and to raise new capital, and was mounting with NPAs thus RBI put it under moratorium. Due to these reasons, the entire market as well as Bank Nifty were severely hit, leading to a massive drop.
After a massive rally, Reliance’s stock price declined in recent due to uncertainty in the oil market. Reliance’s weight in the stock index is significant enough to have a large impact on the market. After quarterly results of prominent banks like Kotak Mahindra and ICICI, Nifty Bank joined the bull market and started regaining the lost momentum.
Looking at the current trends with positive news of vaccine, decreasing uncertainty on loan moratorium impact on banks, decreasing uncertainty over NPA crisis, it seems there might not be stopping for banking stocks anytime soon.
What are your thoughts on the same? Is the worst over for Bank Nifty? Has the NPA crisis near to be solved?
Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.
- NIFTY 500 is India’s first broad-based stock market index of the Indian stock market. The NIFTY 500 index represents about 96% of total market capitalization and about 93% of the total turnover on the NSE.
- Vikram Limaye is the Managing Director and CEO of the National Stock Exchange of India Limited (NSE). Prior to joining NSE, Limaye was the Managing Director & CEO of IDFC.
- NSE EMERGE is the National Stock Exchange of India’s new initiative for small and medium-sized enterprises and startup companies from India. These companies can get listed on NSE without Initial public offering (IPO).