Finance minister Arun Jaitley met the chiefs of public sector banks in Delhi today (Thursday) to discuss the performance of government banks, the problem of rising bad loans and, more importantly, lack of credit flow to corporations critical to kick start projects. At the meeting the minister asked bankers to restart lending to stalled projects.
The meeting happened in the backdrop of a strong caution from the Reserve Bank of India (RBI) on Wednesday about the potential risks of a sharp growth in the retail lending in the recent months, especially to the consumer durables segment.
The apex bank fears that pushing too much credit to the retail customer, beyond his absorptive capacity, could lead to over-indebtedness and resultant stress on the books of banks.
The RBI’s concern is justified if one looks at banks’ rapid credit expansion to retail segments in the last one year.
Let’s take a look at the numbers. Bank loans to the consumer durables segment grew by 48 percent on a year-on-year basis (38 percent a year ago) in the 12-months ending September, whereas the overall non-food credit growth stood at a mere 8.6 percent.
Similarly, credit card outstanding grew by 17.4 percent on year in the 12-months period as compared with a mere 2.1 percent in the corresponding period last year. Vehicle loans grew 18 percent, slightly lower than 23 percent in the previous year. Housing loans grew 15 percent compared with 20 percent.
Why have banks suddenly developed a liking to the retail segment?
In the face of lacklustre demand from corporations, banks have clearly found a saviour in the retail customer, where there is still some demand.
Also, overall credit growth continues to lag behind the deposit growth significantly. This adds to the carry cost of banks, forcing them to deploy the funds somewhere. In fact, the real reason for the deposit rate cuts by banks in the recent past is to discourage fresh deposit flows.
Banks are already over-invested in government securities with average SLR holding somewhere about 28 percent compared with the minimum 22 percent. So avenues to deploy funds are limited.
From a risk perspective as well, salaried individuals have better repayment record compared with companies. Banks’ retail bad loans have been insignificant compared with that from corporate loans. That explains the rise in the loan exposure to individuals to buy cars, two-wheelers and apartments and other consumption-related needs.
But the RBI is clearly worried that pushing too much credit to the retail customer can lead to a breaking point, such as the one happened in the microfinance sector some four years back.
The microfinance movement, which took birth in the mid-90s, came to the rescue of millions of low-income households, who did not figure on banks' radars. Micro-finance companies offered small-ticket loans to these unbanked poor to fulfill their financial needs.
But eventually the dynamics of the microfinance changed when private equity firms sensed a bsuiness opportunity in the sector. Profit-motive outweighed livelihood promotion in the agenda of microlenders. The companies began pushing multiple loans to the same borrower to grow their book. This chain logically collapsed in 2010 when loan recovery practices were questioned by state and central governments.
RBI, logically, doesn’t want to let a retail loan bubble growth in the commercial banking industry.
Why are banks not lending to companies?
As Firstbiz had highlighted before, practically, there is no demand from corporations even after the revival talk. After a long time, one big-ticket loan happened in India when SBI recently agreed to extend a $1 billion loan to fund Adani’s Australia coal project. The decision of SBI to give the loan to a seemingly loss-making segment, from where other banks have largely stayed away, has been questioned.
Credit growth is near-stagnant to industries, especially to medium- and large-sized firms. Loan flow to mid-sized companies shrank 2 percent in the 12-month period until September and those to large firms grew by a mere 4.7 percent compared with 18 percent in the previous year.
Any strong revival in economic activities can happen only when banks loosen their purse strings to companies and real action begins on the ground. Several stalled projects are still not back on track and new projects are yet to happen, according to bankers Firstbiz spoke to.
Seen in this context, the finance minister's subtle push on banks to resume lending to projects assumes significance because he is committing the mistake his predecessor did -- micro-managing the state-run banks. Its best to leave banks do their business.
During the UPA's regime, the finance ministry used to interfere in the functions of the public sector banks, influencing their business decisions on critical aspects such as credit offtake and loan pricing. In their desperate bid to meet the credit growth targets, which were reviewed in periodical meetings, they resorted to careless lending.
The result is for everybody to see. Much of the reasons for the current spike in the bad loans is because of the reckless lending they did.
The link is very clear: when the single-minded focus is expansion of loan book, credit quality suffers and bad loans pile up. At present, Indian banks are sitting on about Rs 2.6 lakh crore of bad loans, of which over 90 percent is on government banks' books.
But Rs 2.6 lakh crore is only one part of the story. Apart from these, there are about Rs 5-6 lakh crores of restructured assets. A significant chunk of the restructured assets are hidden non-performing assets (NPAs). Bad and restructured loans impact the profitability of banks and significantly add to their capital requirements.
Before prodding the banks to lend to corporates, what the government should do is, find ways to resolve the structural bottlenecks that delay projects and prevent firms from coming up with fresh proposals. A real revival on the ground will result in genuine demand for fresh money.
It is unlikely that any bank will consciously block money to a good project -- one from which return is guaranteed. On the other hand, forcing state-run banks to lend more to any particular segment undermining the risks and influencing their business decisions can boomerang.
By Dinesh Unnikrishnan FBiz 20 Nov 2014
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