When will banks lend again? | Mint
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Business News/ Opinion / Online-views/  When will banks lend again?
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When will banks lend again?

The engine of bank credit growth in the past year was retail lending and not loans to corporations

Corporations have preferred to raise money from alternative sources such as commercial paper even as finance from other non-bank sources, such as foreign direct investment and external commercial borrowing, has also increased. Photo: MintPremium
Corporations have preferred to raise money from alternative sources such as commercial paper even as finance from other non-bank sources, such as foreign direct investment and external commercial borrowing, has also increased. Photo: Mint

Bank credit growth dropped to an 18-year low in the year ended 31 March. Indeed, there aren’t too many fresh investment proposals by Indian companies, but that’s just one side of the story. The other side is banks’ reluctance to lend for fear of piling up bad assets.

Bad loans hurt banks in two ways—they do not earn any interest on such assets and on top of that, lenders need to set aside money to cover potential losses that they might incur on such loans. This affects their profitability. As a result of this, they are not able to build capital and, this in turn, impairs their ability to lend. For every 100 worth of loan, a bank needs to have at least 9 in capital.

Bank credit stood at 68.3 trillion as on 3 April, marking a growth of 12.6% in the past one year. The growth is marginally slower than the 13.4% growth in the previous year. But for the sudden surge in the last fortnight of March, the growth would have been tardier. Till 20 March, banks’ credit growth was 9.6%. Many do not take the last fortnight’s business growth of banks seriously, as in their over-aggression to build their balance sheets, banks lend money which can be placed with them as deposits by their borrowers, thereby swelling both loan and deposit portfolios.

According to the Reserve Bank of India (RBI), corporations have preferred to raise money from alternative sources such as commercial paper even as finance from other non-bank sources, such as foreign direct investment and external commercial borrowing, has also increased.

A relatively stable exchange rate has been encouraging corporations to borrow overseas. There are other reasons as well. For instance, banks have sold stressed loans to asset reconstruction companies and that has shrunk their loan books. Besides, with the slide in international crude prices, bank borrowing by oil marketing companies has dropped significantly. The slowdown in credit growth is more pronounced in state-run banks that account for about 70% of the industry.

The government, on its part, has been trying to revive stalled projects and speed up big-ticket greenfield projects that have been on the drawing board for years.

Going by media reports, the government has asked the cabinet secretariat to aggressively push for implementation of at least 135 public investment projects worth 2.5 trillion, including several projects in infrastructure and energy sectors that have been stalled because of land acquisition and other regulatory issues. There are 332 public-private partnership projects worth 10.2 trillion that have not been closed; around 110 private sector projects have also been stalled, involving investments worth almost an equal amount.

If indeed these projects take off, will the banks come forward to lend money? I have my doubt as the main reason behind the slow credit growth is the increasing risk aversion of banks. The engine of growth in bank credit in the past year was retail lending such as loans for consumer durables, vehicle loans and home loans, and not loans to corporations.

Gross non-performing advances (NPAs) of Indian banks had risen to 4.5% of total advances in September, from 4.1% in March and the net NPAs had increased to 2.5% in the first six months of the fiscal year from 2.2%.

In the December quarter, the situation worsened with the gross NPAs of 40 listed banks rising by 8.93%—from 2.69 trillion to 2.93 trillion. After setting aside money, the growth in net NPAs has been even higher. Along with restructured assets, stressed loans of the banking system now are more than 10% of total loans and the growth in bad assets has been far higher than the growth in the loan books of banks. You can lead a horse to water, but can you make it drink?

A tighter loan-sanctioning process and a bankruptcy law to deal with failed companies will help change the situation. Along with that, there must be a roadmap for infusing capital in banks, but the government doesn’t seem to have any plan for this. According to an RBI estimate, in order to comply with the new Basel norms, public sector banks need around 8 trillion of capital till March 2019 if their annual credit growth is 20%, and the need for capital will be around 5 trillion if the credit growth is 15%.

The government is willing to infuse capital only in relatively efficient public sector banks and that too a meagre amount. How will the not-so-efficient public sector banks remain in the business of giving loans? They will not be able to tap the capital market to raise money as investors do not have appetite for such bank stocks.

After a long fight, the Indian central bank has been able to tame inflation and usher in an easy money regime. With the cost of money coming down and the government pushing for reforms, Asia’s third-largest economy is at the cusp of a new growth cycle.

At this juncture, we need to have well-capitalized banks that are willing to support the investment plans of corporations. While the government, the majority owner of public sector banks, is still groping in the dark on the recapitalization issue, RBI can to some extent support the capital needs of banks by stealth—cutting cash reserve ratio (CRR) or the portion of deposits that commercial banks need to keep with the central bank on which they do not earn any interest.

Currently, the CRR is pegged at 4% of bank deposits. Going by the rule book, CRR is a liquidity tool—any cut in CRR infuses liquidity in the system and when it is raised, money is sucked out of the system—but RBI can use CRR cut as a backdoor recapitalization tool. The banks will be able to earn interest on the money that will be released by a cut in CRR and this will boost their profits and, in turn, capital and make room for them to lend.

Tamal Bandyopadhyay, consulting editor of Mint, is adviser to Bandhan Financial Services Pvt. Ltd, India’s newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck. The writer’s Twitter handle is @tamalbandyo.

Respond to this column at bankerstrust@livemint.com.

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Published: 27 Apr 2015, 12:09 AM IST
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