MUMBAI: Is the Indian economy finally free of the toxicity that infected balance sheets of companies? Will it now be free to quicken its pace of growth?

The 3Q performance of State Bank of India shows that banks are clearing their decks to fund the economy’s growth. But the disease of overleverage is not fully cured.

SBI reported an impressive 16% growth in domestic loan offtake, which was surprisingly led by growth in its corporate book. This is a departure from the retail-led loan expansion seen in the past two years. SBI gave 20% more loans to companies than it did a year ago and a lot of it is indeed working capital. In other words, firms that have pared their debt burden over time are back to borrowing.

To its credit, SBI has remained cautious. Much of the new loans have gone to borrowers in the services sector. Loans to services companies surged 68%, followed by petrochemicals at 23%. Loans to the troubled infrastructure sector, which grew 19%, are mainly to projects with good ratings, SBI elaborated.

Even as firms borrow more, delinquencies are reducing. Part of this is due to the threat of insolvency proceedings. This is visible from the steep fall of 60% in fresh slippages for SBI. The stock of dud assets has fallen and helped by strong loan growth, bad loan ratios have improved. Now, gross bad loans form only 8.71% of SBI’s loan book, compared with a stiff 10.4% a year ago.

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

What about old borrowers?

This is where the trouble lies. SBI had to write off a quarter of its loans that belonged to the first two lists of accounts referred to insolvency courts. During the December quarter, reductions to its bad loan stock through write-offs were more than 18,000 crore. That is double that of the previous year. It has put the loan account of Essar Steel on sale.

Clearly, SBI is trying to clean its books even if this means forgoing high recoveries. Hence, it can hardly be blamed for continuing to ramp up provisioning. It has insured its balance sheet by having a coverage ratio of 75%. For loans that are stuck in insolvency proceedings, SBI has covered 67% by provisioning. It has made 100% provisioning for 20 accounts.

It is clear that SBI is wiping its balance sheet clean to make way for new strong credit. Likewise for the economy, as strong firms buy out weaker ones with good assets, growth may indeed revive.