Reserve Bank expands exemptions under Large Exposures Framework for Priority Sector Lending Shortfalls
The Reserve Bank of India (RBI) has issued notification yesterday, expanding the scope of exemptions under its Large Exposures Framework (LEF). According to the notification, RBI modifies paragraph 3.1 of the LEF to broaden the scope of entities for which exposures can be excluded from the LEF limits. Under the earlier provisions, banks were allowed to exclude from LEF calculations only those deposits maintained with the National Bank for Agriculture and Rural Development (NABARD) made on account of shortfalls in meeting Priority Sector Lending (PSL) targets. The RBI has now extended this exemption to include similar contributions made to: National Housing Bank (NHB) Small Industries Development Bank of India (SIDBI) Micro Units Development and Refinance Agency Ltd. (MUDRA Ltd.) Any other entity specified by the RBI The updated rule clarifies that these exclusions apply only when the contributions are made to offset PSL shortfalls. By revising paragraph 3.1 of the LEF, the RBI has effectively increased the range of permissible exemptions under the exposure norms, granting banks greater flexibility in managing their credit exposure portfolios.
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One sector which we have been playing now has been the chemical sector, and that has been out of favour for quite some time. The stocks have not done well for the last two years and there are some interesting ideas which are coming up there, especially because globally, a lot of dealers have destocked chemicals. The stocking level at the dealer-end is close to a two-year low and that is where we see some upside coming through in demand. Here we have to be careful because stocks are still not cheap. So, look for stocks where there is a substantial earnings growth upside over the next two years. But in general, chemicals is one sector we like. The other sector which we like is the cement sector. Cement has not done much in terms of earnings growth, and has been flattish for the last 12-18 months. There has been a lot of consolidation in the sector which probably helps over the next couple of years because it becomes easier to hike prices. 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But for us, over the next three-five years there is lot of visible growth there and so just the sheer growth which we have most companies there could have a growth compounded for the next maybe three-five years or in the range of 25% plus, so that is what is really probably going to drive earnings in the space. None of these stocks are very cheap, so when we look at it, we always think that the valuations have a lot of margin of safety probably, but we are quite confident that the earnings will play out and so that is what we are playing. Now, there are obviously two other spaces in the pharma space, one is domestic pharma and the other is the US generics or in general the global generics. So, we have actually been more positive on the US generic side than on the domestic pharma side because US generics had done quite poorly for four-five years and for us, we were sensing a turnaround. We have been playing US generics for the past 18 months, and that is where there could be a lot of wobble if Trump changes some duties there. But for us, the duties will create temporary dislocation. But Indian generics are really cheap. There would not be a longer-term impact. At some point, the consumer prices in the US will probably go up to reflect the duty changes. So, we would be bullish on US generics on any correction and we like the CDMO space. After the correction that we have seen in the SMIDs, are you comfortable with the valuations? As far as the smallcaps are concerned, there could be an improvement in the earnings growth going ahead. Do you see comfort in buying into smallcaps or would you still be wary of the broader market? Jyotivardhan Jaipuria: When we started the calendar year, it was a very easy call that the largecaps will do better than the smallcaps because that time the valuation disparity was huge. After the correction that we saw in January-February, we became more neutralish. In fact, the tilt became slightly more towards the small and midcaps because like you said the earnings are much stronger for the small and midcaps. Even in the last quarter, the earnings growth for the midcaps was close to 17-18%, the earnings growth for the smallcaps was just about double digit and the earnings growth for the largecaps was more like 5-6%. So, the earnings growth will be sharp and with liquidity coming into the system, earnings growth this year will surprise on the upside for the small and midcap which will drive earnings. At the same time, one should be careful of being a very blanket call because there are a lot of pockets in the small and midcap which are not very cheap. You have to look at valuations a little more closely because this is not like a runaway which we saw post Covid where every smallcap was flying. I would be a little more positive on the smallcaps but be careful of the valuations and look for stocks with earnings visibility. I want to get your overall view on SMIDs. Last time we spoke, you said the next leg of growth is going to be driven by earnings and just before you were mentioning all the sectors that you prefer, they have an earnings upside. Last time you said that 12% recovery in FY26 is what you expect in terms of earnings. Do you still retain that view or has it changed and what is the outlook there? Which are the sectors that are going to drive this growth? Jyotivardhan Jaipuria: We still retain that view that we will get double-digit earnings growth for FY26. As you know, FY25 was a very weak year for earnings, so one is probably the base impact helps and what you will see over the next six months is like a very poor base of government and corporate capex. It will be easier to show growth for a lot of these companies which are dependent on government capex. The other thing that will help is liquidity in the system. Rates are coming down, and that will be very positive for earnings to come through. In terms of, what will help, basically, we will see some of the engineering names and the capital good names continue to do well. Some of the consumer discretionary names will also show strong earnings growth. We will probably see a rebound in some of these commodities, like cement which will play an important role in terms of driving the earnings growth for next year, plus stuff like telecom.
