Mumbai: Banks are still not lending to companies despite the Reserve Bank of India, or RBI, cutting interest rates and increasing liquidity, complain analysts and chief financial officers of Indian firms.
Bankers refute this, insisting that demand for loans is sluggish as companies contract expansion plans in the backdrop of an economic slowdown.
RBI has slashed the cash reserve ratio, or the portion of deposits that banks need to keep with it, by 400 basis points and bond holding requirement by 100 basis points since October, releasing more than Rs2 trillion into the system. One basis point is one-hundredth of a percentage point. The liquidity-starved banks had borrowed Rs91,000 crore on a single day in September and are now parking their excess funds with the central bank.
But this has not provided much relief to the firms, their executives claim.
Injecting money: In a bid to increase availability of funds to companies, the Reserve Bank of India has slashed the cash reserve ratio by 400 basis points and bond holding requirement by 100 basis points since October. Harikrishna Katragadda / Mint
Bankers, however, are not willing to accept this argument.
“We have to see the creditworthiness of those firms which are saying we are not lending. We cannot lend to those who will default (in repayment),” said an executive director of a Mumbai-based public sector bank, who didn’t want to be identified.
Another executive director of a large public sector bank blamed the firms’ inability to raise owners’ equity in projects for the slowdown in loan growth. “For projects, companies need to bring in their own equities, and based on their equities, we disburse loans. If the companies are not raising their equities in the projects, why should we raise our loan limits?” the official asked, again on condition of anonymity.
Interestingly, not all executives disagree with this. Seshagiri Rao M.V.S., finance director, JSW Steel Ltd, said: “For them (banks), it is a call they take, project by project, case by case, which I believe is a right thing to do. For promoters to fund new projects and put their share of promoter’s equity, there are difficulties in today’s climate, as the two sources of promoter’s equity—cash accruals from existing businesses and the equity market—are not the same as before.”
According to him, working capital is more forthcoming. “Whatever sanctions and disbursements the banks had committed in the past, have not been stopped,” he said.
However, Y.M. Deosthalee, chief financial officer and a board member at engineering and construction firm Larsen and Toubro Ltd, doesn’t entirely agree.
“Today, banks have a lot of money. But they are not lending since there is risk aversion. The problem is that they are not lending to the sector that needs it,” Deosthalee said in a recent interview. “For example, they are not lending to small and medium enterprises. They do not want to take risk... One has to make sure that the entire chain is funded properly”.
M.D. Mallya, chairman and managing director of Bank of Baroda, said there could be some slowdown and slackness in demand for credit from sectors such as steel and auto ancillaries, but “we are not denying credit to the deserving customers if they pass our appraisal procedure.”
S.C. Gupta, chairman and managing director of Kolkata-based United Bank of India, saw demand for loans from certain sectors such as small and medium enterprises, or SMEs. “We are not denying credit to the SMEs. They constitute a bulk of our loan book,” said Gupta.
Despite a drop in credit pick up in the December quarter, the year-on-year credit growth continues to be high at about 24%. But even then, firms are not finding it enough and clamouring for more money from banks as other sources such as the equity market and external commercial borrowings have dried up.
“If existing customers are seeking an enhancement in credit lines, we are giving it to them. We have not held back any disbursements,” said Romesh Sobti, managing director and chief executive officer, IndusInd Bank Ltd.
According to Paresh Sukthankar, executive director of HDFC Bank Ltd, the credit demand has picked up picked up in the last few weeks. “There could be customers who are complaining about banks not lending to them, but the reason could be that banks are not wanting to increase their exposure to these customers,’’ he said.
Indeed, banks are playing safe as their non-performing assets have been on the rise. An economic slowdown dents corporate profitability and ability to pay back bank loans.
Rana Kapoor, managing director and chief executive officer of Yes Bank Ltd, defended banks’ caution in this “challenging environment” and said “they are right in being choosy when they add on new customers”. “In the coming quarters, I would not be surprised if the credit growth for the banking system slows down to about 18% to 20%.”
Loan growth will be low this year because last year banks had lent aggressively to oil marketers to meet their rising need for working capital. Oil prices, which started rising since September 2007, zoomed to a record $146 a barrel in June 2008.
According to analysts, about 40% of the credit disbursed in the first half of 2008-09 went to the oil marketing companies. Mint could not independently verify this.
Crude prices have dropped to below $40 a barrel now and the demand for funds from the oil marketing companies have dropped sharply.
In the changed economic scenario, it seems finding customers who want money and are also creditworthy is emerging as the biggest challenge for banks.
Speaking at a function in New Delhi last week, Uco Bank Ltd’s chairman and managing director S.K. Goel said: “Today, there is a lot of liquidity with the banks but nowhere to lend.”
Sobti of IndusInd Bank expects incremental credit demand to slow down as industries such as steel and commodities are going through tough times. “The sectors that lead the growth in credit, like exports, consumer finance, capital markets, have all seen slackening that will reflect on credit growth numbers,” Sobti said.
Parthasarthy Mukherjee, president, credit, at Axis Bank Ltd, also voiced the same concern when he said: “We have not seen any new projects coming up. The advances growth we have seen in the quarter gone by was largely on account of old sanctions. Incremental credit demand has slowed down.”
Andhra Bank’s chairman and managing director R.S. Reddy seemed to be the lone voice of optimism on the credit front. “We cannot decidedly say there is no demand for credit now. It will take one or two months to see where there is a slowdown,” he said.
Meanwhile, in the absence of loan demand, banks are increasing their investments in government bonds. The yield on 10-year benchmark paper dropped to 4.86% in January from 9.5% in July. As yields drop, bond prices rise and banks make risk-free money in trading bonds.
Satish John contributed to this story.