India’s banking community would like to sing the 1929 Leo Reisman song Happy days are here again, best remembered as the campaign song for Franklin Roosevelt’s successful 1932 presidential campaign. The banks just closed all formalities for a Rs.35,000 crore project loan for Tata Steel Ltd, India’s largest steel maker, and around Rs.9,900 crore long-term loan for Hindalco Industries Ltd, the world’s largest aluminium rolling company.
These loans could be harbingers of change for the banking industry, which hasn’t seen too many corporations approaching it for loans. Even those who have their loans already sanctioned are not lifting them as nobody is willing to invest when uncertainties envelop a sagging economy. In the current fiscal year till the first week of September, loan growth has been just 3%, lowest since 2009 when the world experienced the worst credit crunch in history, against a deposit growth of 7%. In absolute terms, banks have disbursed Rs.1.38 trillion loans, roughly a third of deposits (Rs.4.12 trillion) they have collected.
On a year-on-year basis—between October 2011 and September 2012—bank credit has grown 16.6%. This is lower than the 20.4% growth in the previous year. The Reserve Bank of India’s (RBI) loan growth projection for the current fiscal is 17%.
One reason behind the tardy credit growth is high interest rates. After raising its policy rate 13 times in past two years to rein in high inflation, RBI cut its policy rate by half a percentage point in April, but all banks have not reduced their loan rates as yet. By raising the interest rate, RBI has to some extent been able to dampen demand, which is needed to fight inflation, and the scenario won’t change overnight. India’s gross domestic product grew at 5.5% in the first quarter of fiscal 2013 against a 8% growth in the first quarter of 2012. Loans given to industrial units have slowed considerably while agriculture and allied sectors continue to draw money from banks. Some of the large state-run banks’ international loan books have grown well but most are seeing a lack of appetite for money in their borrowers. The nation’s largest lender State Bank of India’s deposit liability in the first five months of the fiscal year grew three times higher than its loan book. It is buying short-term treasury bills to cover the cost of money while staying liquid to meet the loan demand of corporations as and when they return.
Banks have not been aggressively pushing for loan growth for fear of rising bad loans as borrowers’ ability of paying back loans gets eroded when rates are high. Besides, state-run banks seem to be in the grip of a fear psychosis after a series of investigations by government agencies of bank lending to the telecom, mining and real estate sectors. This has affected decision-making at most banks. There have been multiple investigations on allegations of irregularities in the allocation of second-generation telecom spectrum and licences and in the offer of coalfields to companies for captive use. Bankers have also been grappling with an uncertain investment climate after the revelations of improprieties and flawed government policies in the allocation of natural resources.
Clearance of the two large loans have coincided with the government push for reforms that started in mid-September with the rise in diesel prices and capping of highly subsidized cooking gas cylinders along with opening up aviation and retail sectors to foreign investors, bulldozing stiff political opposition. Typically, such loans take months to close all the formalities and their closure is in no way connected with the spurt in economic reforms but they can certainly help change the investment climate for the better. They will encourage borrowers to take a relook at those projects that they had shelved and bankers to get over their fear psychosis. Indeed, things are changing for the better. Since mid-September, Sensex, the bellwether equity index of BSE, has risen 4.12% and the rupee has gained 4.83% against the dollar. Foreign institutional investors have bought Indian stocks worth $3.1 billion in the last fortnight, net of selling. Things will get even better if the government demonstrates its resolve to sort out issues related to labour, land acquisition and mining laws.
The time is not right as yet for celebration but bankers should feel happy that at least a new beginning is being made. They should thank the following persons for the dramatic change in business sentiment:
• Congress president Sonia Gandhi, for sending former finance minister Pranab Mukherjee to the Rashtrapati Bhavan after a disastrous 2013 budget. Mukherjee’s proclivity to blame coalition politics for the government’s inertia to push for reforms had done the maximum damage to the country.
• Palaniappan Chidambaram, for quickly undoing the damage.
• Prime Minister Manmohan Singh, for reliving the 1991 days when India, faced with its worst balance of payment of crisis, was forced to open up the economy. Singh was the country’s finance minister then. After a 21-year long sleep, Singh, who turned 80 on 26 September, finally decided to call the bluff of Mamata Banerjee’s politics.
• India’s top auditor Vinod Rai. After all, the trigger for reforms is the government’s desperation to divert attention from massive irregularities and loot of government money that Rai has relentlessly been pointing out.
• And, finally, the global rating agencies. Had there been no threat of downgrades, the government wouldn’t have bitten the bullet.
Indian economy is not out of the woods as yet but the flow of foreign money and the rupee’s appreciation are for certain now even though inflation remains a worry. That’s a challenge for RBI. The banking sector’s challenge is to give money to corporations and make sure the loans do not turn bad.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to email@example.com