Crisis of confidence hits banks, borrowers

Last Updated: Tue, Nov 20, 2012 20:11 hrs

Last month, senior executives of a foreign bank with significant presence in India met clients from key markets abroad to explain the implications of the reforms announced by the Indian government in early September. What they heard from their clients was simple: while there was a consensus that the announcements helped avert possibilities of a sovereign rating downgrade, hardly did anyone believe there was a realistic chance of these being implemented.

“Growth coming back to seven per cent in the next financial year is highly unlikely. At best, we can say, ‘next year may be better than the current one’. But the worst part is a crisis of confidence,” said a banker who attended the meeting. According to bankers, that precisely is the reason why corporate credit growth continues to remain sluggish. The Reserve Bank of India (RBI) has cut its growth projection for the current financial year to 5.7 per cent in October, from 7.3 per cent projected in April. Credit growth forecast has also been lowered to 16 per cent, compared to the 17 per cent projected earlier. The sluggish loan growth comes amid high interest rates and banks’ increasing reluctance to lend to the so-called stressed sectors such as telecom, steel, infrastructure, construction, and textile, among others. These are the sectors that have seen the sharpest rise in non-performing assets (NPAs).

State Bank of India Chairman Pratip Chaudhuri says the pipeline is almost dry in the commercial lending sector, as the growth outlook looks very slow. This is despite the fact that resources available with banks are adequate. “There are plenty of resources available with the SBI, so increasing the loan growth will not be a problem for us. But we want more cuts in the cash reserve ratio so that funds available for lending increases,” says Chaudhuri.

The country’s largest lender backs that argument with facts. Deposit accretion for SBI was robust in the first half of the current financial year. “We are sitting on deposits worth Rs 70,000 crore to Rs 80,000 crore,” he says, adding that loan growth was to the extent of six-seven per cent during April-October. As corporate demand continues to be sluggish, SBI has focused on beefing its retail portfolio by aggressively cutting interest rates.

Chiefs of other public sector banks also say the government has indicated that capital will not be an issue for loan growth, and will ensure that banks are well-capitalised.

Bankers also say the asset quality concerns are being overdone. Listen to HDFC Bank managing director and CEO Aditya Puri: “We don’t need any hysteria on NPAs. While it is okay to raise concern on growing NPAs, we must realise that Indian banks are well capitalised, unlike the failed banking system of developed nations. The banking industry is growing year-on-year at the rate of 17-20 per cent, with healthy balance sheets,” Puri said at a banking conclave in Bhubaneswar in September. The overall consensus is that higher interest rates, which have deterred India Inc. from availing loans from banks, are expected to soften from the next financial year. But what is important is easing the supply bottlenecks to facilitate investment, particularly in the infrastructure sector, so that demand comes back.

“Inflation is a key reason for the high interest rate. Credit flow is muted as investments are not happening. While the interest rate will fall as inflation comes down, what is key is speeding up investments in infrastructure sectors like power and roads. The supply side bottleneck needs to be addressed, like fuel linkages in the power sector. Road projects also need speedy environmental clearances. If infrastructure investment is boosted, it will also have a favourable impact on sectors like steel and cement,” says M D Mallya, chairman and managing director of Bank of Baroda.

Latest data shows growth of credit to the infrastructure sector has fallen sharply to five per cent during the first six months of the financial year, compared to 7.3 per cent during the same period of the previous fiscal. On a year-on-year basis, loan growth to core sector has slowed down to 15 per cent from 20.3 per cent. Loan growth to the telecom sector has fallen in consecutive years (till September).

RBI has also noted that increasing risk aversion has hampered the flow of credit and as a result, banks parked their excess funds in government securities. “In contrast with the overall slowdown observed in the major balance sheet items of banks, growth in investments accelerated during 2011-12, compared with the previous year. This trend partly reflected increase in risk aversion by banks, with a growing preference to park funds in safer instruments, against the backdrop of weak macro-economic outlook as well as rising NPAs,” the central bank said.

With non-food credit declining to 16 per cent for the year till September, compared to 18.7 per cent in the previous year, banks have resorted to investing in safer government bonds, reflected in the rise in the statutory liquidity ratio (SLR) of banks. Bankers say that banks are holding excess SLR of six-seven per cent of their net demand and time liabilities against the mandatory requirement of 23 per cent.

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