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Credit to mid-size firms contracts first time in five years

Total loans outstanding to medium-size firms shrinks 11%; lending growth to large firms lowest in five years
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First Published: Thu, Apr 25 2013. 11 19 PM IST
Photo: Hemant Mishra/Mint
Photo: Hemant Mishra/Mint
Updated: Fri, Apr 26 2013. 12 06 AM IST
Mumbai: Bank loans to mid-size companies contracted in the 11 months to February for the first time in five years amid a slowdown in the economy that also saw a deceleration in loans to large firms, with lenders turning their attention to retail borrowers instead.
Total loans outstanding to medium-size companies shrank 11%, according to the Reserve Bank of India (RBI), the worst fund flow since 2008. Bank lending growth to large companies meanwhile slowed to 13%, the lowest in five years, according to RBI data. 
Such a decline in credit to medium-size companies didn’t occur even in the aftermath of the 2008 financial crisis. At the time, banks grew their exposure to the segment by 9.5%.
In absolute terms, the total loans outstanding of Indian banks to medium size companies fell to Rs.1.83 trillion at the end of February from Rs.2.05 trillion in March 2012.
Retail borrowers, including mortgages, credit cards and personal loans, picked up some of the slack—bank credit grew the fastest in five years to these segments. Banks earn more from retail assets, but also face the risk of loans turning bad unless they exercise vigilance, as has been the experience of some of India’s lenders.
Large companies are those that have investments in plant and machinery above Rs.10 crore; medium-size companies are those that have investments between Rs.5 crore and Rs.10 crore, while small-size companies typically invest up to Rs.5 crore.
The decline in credit to medium-size companies is on account of various factors, including approvals not coming through in time.
“The creditworthiness of every management is under question,” said Abhishek Kothari, an analyst at Mumbai-based Violet Arch Securities. “Besides, there are major clearance delays. After lending to companies, if the loans turn bad, banks have to set aside more money.”
According to Kothari, most of the loan growth for large companies has come from working capital loans and not long-term finance as banks are worried about precisely this—growing bad loans. Banks need to set aside at least 15% of the loan amount if it turns bad against 0.4% for advances that are still healthy, hurting profitability.
Senior bankers admitted that lending to large corporations and projects has slowed in many cases as there is no respite seen from clearance hurdles for projects and a lack of policy changes at various levels of the administration.
“I don’t remember sanctioning any major loan for a corporate project in last one year, just because there are not too many projects happening due to policy paralysis,” said the chairman of a Kolkata-based public sector bank. “We don’t want to add to our NPAs (non-performing assets). We have shifted focus to retail assets such as home loans,” he said.
The United Progressive Alliance government has, however, sought to make progress on its reform agenda with several measures aimed at improving the investment climate since September.
Rising bad loan numbers testify to the fears of bankers. Gross NPAs of 40 listed Indian banks rose to Rs.1.79 trillion in December from Rs.1.25 trillion a year ago, an increase of 43.1%.
Banks may see NPAs rising 25-30% due to a large portion of restructured loans going bad if there isn’t a significant revival in the economy. Restructured loans are currently estimated at about Rs.4 trillion.
India’s economy is likely to have grown at 5% in the last fiscal year. The government has forecast the economy to advance at 6.1-6.7% in the current year.
To instil confidence among investors, finance minister, P. Chidambaram recently met industrialists and bankers promising steps to remove structural bottlenecks that delays various projects. But the promises need to be converted into action, bankers said.
“There are not much opportunities to lend to corporates, because most of the projects are stuck in clearance delays and policy bottlenecks. That is the reason for declining credit growth,” said B.A. Prabhakar, chairman and managing director of Andhra Bank. “The focus has shifted to retail... This is not going to change unless clearance issues are sorted out and project implementation starts.”
Typically, smaller companies feel the pinch in a slowing economy as large corporations often pass through higher costs to them. This, coupled with dwindling demand for products, hampers the repayment capacity of small and medium-size companies, resulting in loans going bad and acting as a disincentive to banks.
State Bank of India (SBI), the nation’s largest lender, saw a significant increase in bad loans from the mid-market segment in the recent past. In the December quarter, SBI’s slippages from such companies were Rs.3,842 crore, compared with Rs.539 crore in the large corporate segment and Rs.2,112 crore in small and medium enterprises (SMEs).
SBI has not imposed any blanket ban on loans to corporate firms, but is avoiding projects in which clearance delays have impacted cash flow, said Diwakar Gupta, chief financial officer.
“We look at projects on a case-to-case basis. Wherever there are clearance issues, we might not be keen to lend. If the projects are on track, we lend to those projects,” Gupta said.
According to a finance ministry estimate, 215 existing projects that have already got bank loans, involving an investment of at least Rs.250 crore each and adding up to about Rs.7 trillion, have been stalled. On top of that, 127 new projects—to which banks have sanctioned loans but hasn’t disbursed money—haven’t got off the ground. The money involved in these projects is around Rs.3.5 trillion. Overall, projects worth Rs.10.5 trillion have been stalled—roughly 20% of the entire banking sector’s loan exposure.
Banks have so far given Rs.54,000 crore to these projects.
The economic slowdown has forced companies to put plans for new projects on hold. India’s industrial production slowed to 0.6% in February from 2.4% in January, signalling that economic recovery has yet to take firm root.
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First Published: Thu, Apr 25 2013. 11 19 PM IST
More Topics: banks | RBI | loan growth | NPA | credit |