PSB-recap may not spur credit-growth PDF Print E-mail
Saturday, 14 September 2019 00:00
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Shobhana column


At 10.15% year-on-year (y-o-y), the growth in non-food credit, in the fortnight to August 30, was the lowest in nearly two years. This, at a time when the banking system has an estimated liquidity surplus of over Rs 1 lakh crore. While credit typically contracts in the period between April and August, the contraction this time around has been bigger than in the corresponding period of FY19. Most private sector banks have enough growth capital, though some state-owned banks may be a little short of it. Also, deposits, while not flooding banks, have been growing at an average of 10% y-o-y—though the latest reading has seen a fall to sub-10% y-o-y.

This, then, begs the question: Is it a problem of lack of demand, or are banks simply not lending? It is important to understand what exactly is happening because there is a lot of hope riding on the capitalisation of state-owned banks. On paper, the math looks encouraging, even exciting—Rs 70,000 crore of capital, leveraged at a conservative five times, can mean additional lending to the tune of Rs 3.5 lakh crore; further leveraged, it could translate into loans of Rs 4.2 lakh crore, or even Rs 5 lakh crore.

That is a lot of money, but it must be lent prudently, to borrowers who give it back. The problem is that in the midst of an economic slump, banks are unlikely to find enough credit-worthy customers either in the corporate world or on the retail side. Demand for corporate credit is already down to a trickle. Or, more rightly put, there are probably thousands of companies that are longing for a line of credit, but simply don’t have the credentials to get one. One can’t blame banks for being far more careful about who they lend to; low-rated, over-leveraged businesses aren’t exactly on top of their lists. It is even riskier to lend to the universe of small- and mid-sized firms; auto ancillaries and dealers will struggle more than OEMs. As for top-tier companies, they aren’t in the market for loans anyway.

That, then, leaves the retail clientele. While, at an absolute level, the catchment may be large, the numbers that can form a reliable lending base for banks aren’t. In a more sturdy economic environment, that universe would have grown, but in the midst of a sluggish economy, big job losses and no signs of a near-term recovery, it would stay stagnant or even shrink. Already, aggregate lending by NBFCs has decelerated sharply post the IL&FS and DHFL crises, and, therefore, the flow of credit to certain niche segments dominated by them is drying up. Banks, typically, haven’t operated in segments such as consumer durables loans, which have been the domain of NBFCs. While there is a lot of talk of co-origination of loans, and banks teaming up with NBFCs to fill the gap, it is not clear whether banks really want to move into these spaces since they are clearly ill-equipped to do so.

A glance at the pattern of retail lending over the past year shows banks seem to prefer lending to individuals without collateral; this is reflected in the sharp jump in the unsecured loans portfolios of Rs 1.45 lakh crore. Much of the credit has been put to work as loans against credit cards. The rationale seems to be that unsecured loans bring in much better yields, and can be worth it, if clients are screened properly. In contrast, an auto loan will fetch the bank a much lower yield, and the operational cost involved in repossessing the asset, in the event of a default, is high. Also, unsecured loans tend to be of a shorter duration than, say, an education loan, which could have a tenure of ten years; so, there is less of an asset-liability mismatch. Given this approach would necessitate a more thorough due diligence, it would throw up a smaller pool of eligible borrowers since not everyone would make the cut. Also, since the cost of an unsecured loan is much higher than that of a collateralised loan, not everyone would be able to afford one. That, too, would depress demand. The fresh capital infusion could have seen more auto and home loans being given, but the new rules that require banks to link the interest rate to an external benchmark could queer the pitch. As bankers have said, they will recover the entire interest, or much of it, in the early stages of the loan. That could make the new loan products more expensive than the older ones; this, in turn, will mean fewer eligible borrowers. To be sure, many of the state-run banks that have been starved for capital, will put their new-found resources to use since that is what the government expects of them. Hopefully, they will not fritter it away as they have in the past.



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