Loan growth related to banks easing terms for client
Though the economy has picked up a bit—GDP in the first nine months of FY14 has grown at 4.9% on the back of a 4.5% growth in the same period in FY13—it is surprising that loan growth last year was even as high as 14-15%. So empty was the project pipeline at the start of the year, that analysts had predicted corporate loan growth would barely hit double digits. Data from Reserve Bank of India shows that outstanding loans to large industry stood at close to R20 lakh crore at the end of February 21, a year-on-year growth of 12.2%. Clearly, very little of the money lent was in the form of project finance since, throughout the year, bankers were reminding us that there were virtually no takers for long–term money. While some of fresh loans given would no doubt have been for working capital purposes—many companies are understood to have utilised their limits fully and consequently asked for higher limits—banks are also believed to have generously extended repayment timelines. Moreover, repayment schedules have been re-worked in a manner such that the borrowers pay relatively small amounts in the initial years. In other words, money that should ideally have come back to the banks has not done so, contributing to the increase in the outstanding loan book. To be sure, some leniency may be called for at a time when cash flows across companies are severely strained; it is understandable bankers would want to support their customers especially with a view to ensuring that the businesses stay as robust as possible.
However, if bankers are upping credit lines to customers beyond limits that are prudent, it would be cause for concern. What is also worrying, as Kotak Institutional Equities (KIE) points out in a recent study, is that there are a few cases of banks having converted unpaid interest into loans with the amount as high as 15-20% of the outstanding loans; one company in the power sector saw R164 crore or 18% of the total loan amount being freshly funded, while another in the hotels sector saw R614 crore being newly funded, again 18% of the loan amount. Much of this has happened, KIE explains, with restructured loans; banks have not just given borrowers a moratorium on the interest and principal, they have also converted the interest due into a loan. What this implies is that while banks might report smaller slippages from restructured loans or a smaller quantum of impaired loans in FY15—given that repayments due have been artificially lowered—this might not reflect the correct picture. Indeed, unless there is a rapid and very sharp recovery in the economy, it’s possible banks may land up with more toxic loans in a couple of years.