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India’s largest lender is willing to take risks and lend amid a raging pandemic, even though the rest of the financial year looks like a washout for the economy.

“A bank’s job is to take risks, and this is the best time to take risks," State Bank of India (SBI) chairman Rajnish Kumar said in a virtual press meet while announcing June quarter results.

“It is only if there is a bubble and we keep on lending, it would be something to worry about," he said. He may be right as companies that are down in the dumps may find it hard to inflate projections as they may tend to do during good times.

While this hope may not fit comfortably with a recessionary narrative, perhaps a dose of SBI’s bullishness is what would help the economy get out of the funk covid has brought on.

Not giving credit where due.
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Not giving credit where due.

After all, the biggest hurdle for the government and the Reserve Bank of India (RBI) has been risk aversion among banks. This is threatening the government’s efforts to stimulate the economy through credit flow. For RBI, risk aversion has meant that its 115 basis points reduction in the policy rate within six months has had little effect. Rate cuts, along with an unprecedented level of liquidity surplus, have only made banks binge on risk-free government bonds. SBI, too, has hardly lent, with its loan book showing a sequential 1.5% contraction in Q1.

SBI’s private sector peers haven’t fared well either. “Private banks reported a 2% QoQ contraction in loans as most banks pulled back on consumer lending. Growth slowdown was sharper in the retail segment, given the impact from lockdowns, while wholesale growth fared better, largely led by HDFC Bank, which saw 35% YoY and 6% QoQ wholesale growth," analysts at Credit Suisse wrote in a note.

Indeed, Kumar’s sanguine message sounds counter-intuitive, especially at a time when SBI’s private sector peers have been conservative in their outlook. “What we have done is a lot more of treasury investments, where yields are lower, but they are safer," Dipak Gupta, joint managing director of Kotak Mahindra Bank, said while announcing the bank’s quarterly results last week.

But SBI has good reasons for its confidence. The bank has a project finance pipeline of 1 trillion and a fast-improving growth in retail loans.

Sure, corporate loan book growth was slow at 3.5%, but Kumar is hopeful the pace will increase.

What will make the SBI head walk his talk on lending?

For SBI to lend, two things need to fall in place. One is that the standstill on loans by way of moratorium has to end for an accurate assessment of risk. Indeed, Kumar joins HDFC Ltd’s chairman Deepak Parekh in pushing for an end to the moratorium. Analysts and bankers have lamented that the moratorium distorts asset quality and many expect a surge in bad loans in September. SBI believes it can withstand this onslaught of slippages. Its private peers are not so sure. The race to raise capital by private banks is proof that lenders are fortifying balance sheets ahead of an expected blowout of bad loans.

SBI also plans to raise money, although Kumar said the government’s funds may not be needed.

That brings us to the second factor of demand. SBI needs companies and individuals to come forth and borrow.

A recessionary year and a moribund investment climate for the past five years won’t push firms to borrow.

Regional curbs are proving to be a challenge. Amid a struggle to keep supply chains working, it is unfair to expect companies to put forth plans of expansion.

Besides, firms need to see demand for products from people. A proxy of this demand is the retail loan book. Here the picture is not convincing yet. SBI’s retail loan book growth was flat. Private banks have shown a sharp deceleration as well.

FY21 may be a terrible year for the economy. But, for a quick recovery, it needs banks to increase lending. It is right that the biggest lender takes the first step in this direction.

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