Last month, senior executives of a foreign bank having significant presence in India met clients from key overseas markets to explain the implications of the reforms announced by the government in early September. What they heard from their clients was simple: while there was a consensus that the announcements have helped avert possibilities of sovereign rating downgrade, hardly anyone believed there was any realistic chance of them being implemented anytime soon.
"Growth coming back to 7 per cent 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," a banker who attended the meeting said. Bankers say that precisely is the reason why corporate credit growth continues to remain sluggish.
The central bank 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 as compared to 17 per cent projected earlier. The sluggish loan growth comes amid high interest rate 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.
|Loan growth (in %) of various sectors |
| ||Variation (year-on-year) |
| ||Sep 23, 2011 / Sep 24, 2010 ||Sep 21, 2012 / Sep 23, 2011 |
|Non-food credit growth ||18.7 ||15.9 |
|Industry || || |
|Mining & quarrying (incl coal) ||43.9 ||30.7 |
|Food processing ||25.5 ||19.6 |
|Textiles ||17.5 ||8.4 |
|All engineering ||22.5 ||21 |
|Infrastructure ||20.3 ||15.1 |
|Power ||32.2 ||10.9 |
|Telecommunications ||-10.2 ||-3.4 |
|Roads ||31.9 ||19.1 |
| || || |
|*Retail ||15.2 ||12.6 |
*Retail loans includes consumer durables, housing (upto 30 lakh), vehicle, credit card, among others
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 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 6-7 per cent during the April-October period. As corporate demand continues to be sluggish, SBI has focused on beefing up its retail portfolio by aggressively cutting interest rates.
Chiefs of other public sector banks also say that 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 MD & CEO Aditya Puri. "We don't need any hysteria on NPAs (non-performing assets). 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 conclave in Bhubaneshwar.
The overall consensus is that higher interest rates, which has deterred India Inc from availing loans from banks, is 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 interest rate will fall as inflation comes down, what is key is speeding up investments in infrastructure sectors like power and road. 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 MD Mallya, chairman and managing director of Bank of Baroda.
|Asset quality |
| ||Public sector banks ||Private sector banks ||Foreign banks |
|Gross NPAs as % of gross advances || || || |
|2010-11 ||2.4 ||2.5 ||2.5 |
|2011-12 ||3.3 ||2.1 ||2.6 |
|Net NPAs as % of net advances || || || |
|2010-11 ||1.2 ||0.6 ||0.6 |
|2011-12 ||1.7 ||0.5 ||0.6 |
With bank's non-food credit declining to 16 per cent for the year till September, as compared to 18.7 per cent in the previous year, banks have resorted to investment in safer government bonds which is reflected in the rise in the statutory liquidity ratio of banks. According to bankers, banks are holding excess SLR of 6-7 per cent of their net demand and time liabilities against the mandatory requirement of 23 per cent.
Latest data shows growth of credit to the infrastructure sector has fallen sharply to 5 per cent during the first six months of the financial year compared to 7.3 per cent during the same period of the previous year. 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 two consecutive years (till September).
The central bank has also noted that increasing risk averseness 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," RBI had said.