Bankers cut consumer loans, cry foul on government missive
Bankers say govt directive to boost consumer loans in festive season amounts to directed lending
Mumbai: A government missive to public sector banks to boost consumer loans in the festive season has confused bankers, who argue that the move by the Congress-led United Progressive Alliance (UPA) amounts to government-directed lending ahead of next year’s general election.
On 3 October, the finance ministry said in a statement that the government will infuse extra capital in state-owned banks to help them lend to consumers at lower rates to finance the purchase of two-wheelers and consumer durables to stimulate demand. About a fortnight before, the Reserve Bank of India (RBI) hiked its key lending rate.
The budget for the current fiscal has provided ₹ 14,000 crore towards capital infusion in public sector banks. The latest announcement on capital infusion is over and above that.
Such a step could set a precedent for similar treatment in other segments, which could lead to credit bubbles at some point, besides sending confusing signal to the markets on interest rates, economists said. Analysts cautioned that forced lending could have an impact on banks’ profitability.
The promised capital hasn’t reached banks yet, but they have begun slashing rates. At least seven state-run banks, including State Bank of India (SBI), have cut auto and consumer loan rates by up to 2.5 percentage points.
In the recent past, many banks had increased their base rate, but even those lenders have slashed their rates on auto and consumer loans.
“The approach of the government is not correct. Instead, they should have left it for banks to decide," said the chief of a state-run bank who spoke on condition of anonymity.
Directed loans are typically those given to select segments at interest rates lower than the market rates. In India, so-called priority sector credit is a form of directed lending to ensure the flow of credit to agriculture and economically weaker sections. Banks are required to channel 40% of their loans to such segments.
“This is a case of directed lending. Directed lending in an economy can inherently result in losses mainly because credit discretion tends to be absent," said Abizer Diwanji, a partner and head of financial services at global consulting firm EY, formerly known as Ernst and Young.
“If lending is directed through incentivization, then the government should ensure that it is being done in a good credit risk policy framework. Risk management is very important," Diwanji said, adding that directed lending for a limited period may not damage the system.
At a press conference held on 8 October, A. Krishnakumar, managing director in charge of national banking at SBI, confirmed that the bank had received a communication from the government “on what sort of retail lending we will look at in the next couple of months".
“We have made some plans on this. We have outlined some tweaking to the existing products. But we are waiting for the final clearance from the government on this before we can release any details," Krishnakumar said.
The next day, SBI announced a reduction in its car loan rates.
Dena Bank, IDBI Bank Ltd, Oriental Bank of Commerce and Vijaya Bank, too, slashed car loan rates. Punjab National Bank, the second largest among state-run lenders, cut rates on car loans, two-wheeler loans and consumer durable items by up to 2.5 percentage points.
State-run banks that have cut rates are offering car loans at 10.5%-11%. Private banks are offering car loans at 11%-13%.
Analysts said public sector banks’ margins will be hurt because of lower yields on loans.
“This is a populist measure from the government ahead of elections. I’m not comfortable with the government directing banks at what rate they should lend," said Abhishek Kothari, an analyst at Violet Arch Securities Pvt. Ltd.
State-run banks have no choice but to obey because they are in dire need of capital assistance from the government in the backdrop of more rigorous international norms and the need to set aside money to cover bad and restructured loans, Kothari said.
“Though this may result in some credit growth, the interest margins are likely to get impacted by 10 basis points on account of lower yield on such loans," Kothari said. A basis point is one-hundredth of a percentage point.
“The general direction from the Reserve Bank is an upward bias in interest rates. Many banks had increased the base rates, too. Hence, government asking banks to cut rates gives a confusing signal to the markets,"said Madan Sabnavis, chief economist at CARE Ratings. “When the government is indulging in directed lending, you are becoming a party to that lending. This is not a good sign. Pushing funds to a particular segment is definitely not a prudent move as it clouds the financial judgement of banks," Sabnavis said.
Vaibhav Agarwal, vice-president of research at Angel Broking Ltd, said directed lending can impact the profitability of banks as such loans are riskier and have higher operating expenses.
Bank lending to the consumer durable segment is already high—it grew 35% year-on-year as on 23 August to ₹ 9,400 crore, compared with 11.6% growth in the previous year.
As the end of June, retail bad assets made up 8% of the total gross bad assets of SBI, the country’s largest lender. This segment is the fourth biggest sector contributor to SBI’s bad loans after mid-corporate, small and medium enterprises and agriculture.
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