PROFIT FROM THE AGRI BOOM - 5 (BANKS)

Since a larger agricultural output would result in more money in rural hands, Banks would stand to gain from this phenomenon in several ways. A higher rural income would translate into higher consumption of consumer durables like motorcycles, television sets and other white goods. This would in turn set off an increase in demand for loans from banks and other institutions. With banks being reluctant to give out loans for farming due to potential Government interference in form of farm loan waivers, the natural tendency would be to use income for financing farm needs in the form of seeds, fertilizers etc. and use bank loans to pay for other goods.

Also because the rural populace does not have access to advanced financial products like mutual funds, nor are they comfortable with investing in unfamiliar financial instruments, they tend to gravitate towards bank deposits as their means of investment. This way banks would get access to cheap funds via CASA (Current and Savings Accounts) which would reduce their cost of funds. Even fixed deposits are comparatively a cheaper source of funds for banks.

Those banks which have a wide rural reach are well poised to capture this opportunity. Since most of the rural population have a feeling of comfort and trust with PSU banks, they would prefer to bank with these. Also the fact that PSU Banks are available at extremely attractive valuations make them even better prospects for investment. They also have a history of giving out generous dividends, which serves to reinforce their investment potential for conservative investors. Among PSU Banks, Bank of Baroda, Bank of India and Canara Bank look like good value buys considering the hammering they have received because of notional mark to market losses on treasury holdings, arising out of rise in interest rates.