Advantages and Disadvantages of Investing in Banking Sector

By Advisorymandi
17-November-2018 11:16:51 AM
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Should you invest in the banking sector? Will it benefit my investment portfolio? Questions such as these are of a prime importance in the minds of investors planning to invest in this sector. The significance of the banking sector can be determined by the fact that there are altogether 9 bank stocks listed in NIFTY 50. Moreover, it is just impossible to dream of an economic improvement or revival without an active contribution from the banking sector. That’s not all when it comes to investing in mutual funds, then the banking sector always remains the first choice of the investors. According to many market experts, the value of the bank stocks is expected to increase in the years to follow.

It is quite right that the banking sector is one of the popular investment options, it is also advised that you must adopt a cautious approach and consider several prominent aspects before spending your savings for investing in bank stocks. Now, you will ask WHY? This is because the shares of the banking sector are extremely sensitive to any fluctuation in an economy when compared to other sector shares. Moreover, in recent times, the banking sector has been in plenty of stress because of the rising Non-Performing Assets (NPAs) and a sluggish economy.

 

The BIG Question: Is Investing in Banking Sector Profitable Option?

With the bank shares feeling the heat of the rising NPA’s, market fluctuations, a stagnant economy, etc, here is a look whether it is a right decision to keep the banking sector stocks in your investment portfolio. For this purpose, we have to weigh down the advantages and disadvantages of investing in bank stocks.

 

Advantages of Investing in Banking Sector

 

  • Government’s Initiative to Open More Bank Accounts: The government of India is playing a very active role when it comes to improving financial inclusion in the country by opening new bank accounts. For this purpose, zero balance bank accounts have been opened by the banks under the scheme called Pradhan Mantri Jan Dhan Yojana (PMJDY). While there is no denying to the fact some of these accounts may be inoperative or may have no money, but they have gone on to increase the value of the banking shares. If there is a rise in the number of bank accounts being opened, then it would also mean that the stock prices will also rise steadily.
  • The merger of Banks: Recently, the government merged some small or non-performing banks with big banks. This is indeed quite a good news for the shareholders. The merger of the banks will not only help in reviving the banking sector in India but also create a huge positive impact on the Indian economy. For Instance, if you have shares of the State Bank of India (SBI) and three other banks are merged with it, then just imagine the positive impact it will have on the share prices of SBI. When the banks are merged, then it is quite obvious that the accounts and value of deposits will also get increased. In such a situation, the share price of the bank is likely to rise further and hence, it makes a great sense to invest in the banking sector.

 

Disadvantages of Investing in Banking Sector

 

  • A problem of Rising NPA’s: The growing problem of increasing NPA’s in the banking sector is a key concern. If a payment of the loan is overdue during the last 90 days, then it is termed as a Non-Performing Asset. If the NPA’s are on the higher side, then it means that the banks will be extremely cautious when it comes to disbursing the loans. If you are looking to add bank stocks in your fund portfolio, then ensure that the NPA level is low.
  • The rise of Competition in Banking Sector: With the Reserve Bank of India (RBI) granting new licenses for opening new banks, the competition in the banking sector has certainly heated up. The opening up of the new bank branches will no doubt go a long way in improving financial inclusion but will also limit the performance of the bank shares. This is because the new or old banks will leave no stone unturned to attract more customers by coming up with new schemes or funds. This means that the banks will be eating up each other’s market share. Hence, this may prove to be one of the main reasons for not investing in the banking sector.
  • Availability of Borrowing Alternatives: Many people are more bullish on the Non-Banking Financial Company (NBFC), which basically does a financial business without any banking license. One of the prominent reasons for their growing popularity is that the NPA’s are almost zero and they are less riskier when compared with the bank stocks. There are chances that some of the NBFC’s may even get the banking license from the RBI in the future. So, when the NBFC’s have high growth potential, then why would people prefer to invest in the banking sector.

 

So Should You Be Investing in Banking Sector?

There is no loss in having the banking sector shares in your investment portfolio but you must avoid overbuying. According to experts, the long-term future of the banking sector is quite positive and if you are looking for the long-term investment, then it is worthwhile to invest. Banking sector generally has strong fundamentals and investing in it cannot be avoided by an experienced investor. However, for the short-term investment goals, you can prefer investing in the NBFCs to avoid losses and meet your financial objectives.

 

Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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