When will banks start lending again?7 min read . Updated: 04 Jun 2015, 01:11 AM IST
Excerpts from Mint's second annual South India banking conclave
With rising levels of non-performing assets (NPAs) in their balance sheets, banks have been wary of lending. There are enough signs that the NPA problem will not go away immediately. So, when will Indian banks start lending again? How are banks going to tackle the capital problem? These issues were discussed at length at Mint’s second annual South India banking conclave. The discussion was moderated by Tamal Bandyopadhyay, adviser at Bandhan Financial Services Pvt. Ltd and consulting editor of Mint. Edited excerpts:
When will Indian banks start lending again?
Amitabha Guha (chairman, South Indian Bank Ltd):
You need to appreciate that getting out of debt is not the function of the bank alone; it is a function of the product, function of the institution and more importantly, the macro-economic state of the country, as a matter of fact. Now, bankers have appetite to give money, but if the market does not take money nothing happens. We need to have a look at the macroeconomics—last nine months, we have seen lot of things in terms of direction and intention, but really nothing has been happening in the ground level. I have not seen much of activity in the capex. The issue of deterioration in the quality of assets is a big, big issue. And I think there is a need for the bankers or the lenders to exercise resolution and due diligence. It’s not that they (banks) have stopped lending; lending is a function of so many other external variables, those are the things that need to be addressed. Unless those (are) addressed, banks must apply prudence and go where the potential of getting a non-performing asset is minimized.
Banks are not so keen to lend to the corporate sector for the large projects now. We have started looking at the risk rate part of it—of course, the capital part of it was, on the one side it is getting impaired because of NPA provisions and on the other side, 2019 is staring at all of us. We are not being unique in India. When an economy develops, if you look at say, the US or the UK, I mean, there’s a clear segmentation between an investment bank and a retail bank. And I think in India also, because of more competition, because of stresses which are there in the economy and the cyclical aspect, because of globalization. The banks may be redefining their role, but at the end, what I would say is that if lending opportunity is available, where we can minimize our NPA levels, I don’t think there is any bank which will shy away from that.
It is very frustrating to be sitting in a bank workroom these days because there are not enough proposals coming. There has just not been enough demand. We all know the problem which the corporate sector faced in the last two to four years, which has completely consumed them. And while there has been in the last 9-10 months, definite progress, whether it is the coal sector, whether it is now the spectrum, the telecom spectrum; but, the trickle-down effect of demand coming from all segments of the economy, both from a size perspective and from an industry perspective, has just not happened. So, there is not enough opportunity, as Guha was pointing out, that the boardrooms and the credit people feel comfortable that “yes, this is a good lending to do". So at the micro level, it has not just trickled down, and it will take some time, before it can trickle down. The second aspect, or the second reason in my view, is a very internal reason for a bank—the NPAs are clearly a very big problem linked to the capital adequacy and there was another problem, which the deputy governor pointed out, about the people context, which is, with large swathes of people retiring, the talent pool, and I think Guha also mentioned—the skills and the talent pool are very little in the banks, it’s sinking at a very alarming rate, which also puts a lot of pressure. So, if you have pressure on capital, if you are consumed—the amount of organization and energy going in banks right now, to deal with problem accounts, the NPAs, the restructured account is huge, and therefore naturally, the energy left for business development is reduced quite a lot.
It is a big market, a big environment, under which the banks play; and the government is there, external forces are there, the growth from the different agricultural components are there, so all those things summed together, it was not conducive and it is not conducive, but we are very hopeful that in the days to come it will become conducive.
As a lending strategy, gradually we would like to rope in another group of people, like in the MSME (micro, small and medium enterprise) space. So we’d like to focus first on that area along with our micro credit areas.
When do we see an end to the piling NPAs? Are you seeing any light at the end of the tunnel?
Bhatia: What I definitely see is that in each successive quarter in the last year, the accelerated pace has started coming down. So therefore, we have hit the peak, call it six to twelve months back, and now although we are still seeing increases, but not at the same alarming level we were seeing earlier. The second is that in the last 12-18 months, the entire regulatory framework around stressed assets and NPAs has gone through quite a dramatic change; there have been three or four very, sort of industry-changing regulations which have come up, for the right reasons and in the right direction. But, banking industry is adjusting to it. I would say that in about two-three quarters, you’ll start seeing the percentages start coming down and hopefully as Srivastava is saying, in two years it will be a much more robust line.
Sharma: Looking at the last two-three years, the way the NPA is accelerating, I think that we have not been very realistic in identifying the NPAs as and when it was occurring. Giving my bank’s personal example, I would say that we had hit a high NPA level of 6.5% in December 2013 consistently. The basic problem of the NPA was the corporate NPA. The retail and the SME is not there to that extent. So, once you recognize the problem, then you start devising strategies to work it out.
How do you tackle the capital problem?
Sharma: I think you’ll have to take a lesson from what the public sector banks have done. We need to improve the approval position. The present, last two-three years, has suddenly made us realize that both capital and funds are an issue. So, we are becoming more efficient, we are becoming more frugal and shedding the top line approach.
Srivastava: You have to search for avenues where you can really build up the profits. If you see that the incremental business that you are doing, banks can look at the return on asset. Normally, return of asset in an ideal situation is greater than one. So, incremental business, whatever it be, in terms of creating the asset, there should be a return on asset greater than one, and of course, fee income is definitely one extreme where you can build up the capital.
What are the lessons you have learned?
Bhatia: You’ve got to make sure that you have the expertise and particularly the credit, bigger proposals, larger proposals. I think a lot of the banks rushed into very large ticket proposals without having the expertise in place, both for evaluating the risk and for ongoing monitoring. That’s what banks have paid very heavily for. They never looked at that in comparison to the actual capital they were holding. So, that’s the one main thing that we will have to look into.
Guha: The greatest takeaway for me is that we have overused corporate loans.
Srivastava: It is very important for banks to look at what is the capital requirement and how we are going to match with that. What is the likely percentage of NPA, and definitely a mix of retail loans, agriculture loans and corporate loans. A better mix has to be searched, rather than going for building up books only.
Sharma: I would say skill development would be one essential feature. And another key aspect would be succession planning.