Have our bankers forgotten to lend?

No and yes. The rules of the game have been changed forever...

Last week, addressing public sector bankers at an event in New Delhi, Finance Minister Nirmala Sitharaman asked them to go back to branch banking. Going by media reports, later, at a meeting with the CEOs of these banks, Sitharaman urged them to lend money to the credit-starved micro, small and medium enterprises (MSMEs) even as the bankers insisted that there has been no demand for credit. According to Sitharaman, instead of viewing this as a lack of credit demand, the bankers should prop up credit to the MSMEs. 

No one can find fault with the finance minister’s observation on branch banking. The public sector banks have forgotten branch banking when it comes to giving loans. That’s a big structural change in India's banking industry. The branches are now primarily used to collect deposits while loan applications are processed elsewhere. For private banks, the branches are for mobilising deposits as well as for selling insurance and mutual fund products. Essentially, the branches are points of sale in the new banking architecture. They are dens of sales persons, not bankers anymore. 

Have our bankers forgotten to lend? 

The Reserve Bank of India (RBI) took a series of steps in its monetary policy in early February to encourage credit offtake. It has opened a new window to lend one-year and three-year cheap money of up to Rs 1 trillion to the banks; freed the banks from maintaining cash reserve ratio, from their liabilities for giving fresh credit to MSMEs, automobiles and residential housing till July; and allowed a one-time restructuring of loans given to MSMEs, among others. 

Indeed, it is too early to feel the impact of these measures but the credit growth figures of the industry so far do not tell a happy story. Till mid-February this financial year, bank credit has grown at a measly 2.8 per cent against 9.4 per cent in the previous year. The year-on-year credit growth is equally anaemic — 6.4 per cent, less than half of 14.8 per cent growth in the corresponding period.

A December report of credit rating agency ICRA Ltd projected bank credit growth in the current fiscal year at 6.5-7 per cent, down from 13.3 per cent in 2019. If this happens, it will be the lowest in 58 years. The reasons behind the tardy growth are lower working capital requirements by companies and risk aversion among lenders. There is no slowdown in retail credit growth but this cannot make up for the sharp decline in demand for credit by corporate India.

A recent report of another rater, Crisil Ltd, says the worst may be over for bank credit growth as the demand for retail loans could pick up pace even as economic growth revives in the next fiscal year. Crisil expects bank credit growth to bottom out this year and rise 2-3 percentage points in 2021.

India’s economy grew 4.7 per cent in the December quarter, its slowest pace since the March quarter of 2013 when it grew at 4.3 per cent. With upward revisions of the first two quarters (5.6 per cent for the June quarter and 5.1 per cent for the September quarter), during the first nine months of the current fiscal year, the economy grew at 5.1 per cent. So 5 per cent growth for the full year is now a given. There are many reasons why bank credit has not been growing. 

First among them is the big-time deleveraging by most large corporations. Many of them got into the habit of running their businesses and launching new projects at the drop of a hat, virtually without any equity contribution on their part. They devised ways of converting bank loans into equity. Many of them also could not service their loans either for genuine business failures or external circumstances that did not allow the projects to take off. And, of course, there have been cases of fund diversions. All these have stopped now. The RBI has forced banks to clean up their balance sheets and the new insolvency law has put the fear of god into the promoters.

Bankers have also changed their ways. With the big pile of bad assets staring at them, public sector bankers have shed their obsession for balance sheet growth, for good. Till the RBI drove the big-bang clean-up exercise in banking through an asset quality review which forced the banks to declare their bad loans in the six quarters between December 2015 and March 2017, the rules of the game were pretty simple: All public sector banks were into big-time project financing, irrespective of their size and appetite for risks. A May 2017 McKinsey India Financial Institutions Practice report points out that 49 per cent of State Bank of India’s loans was corporate loans; for mid-sized public sector banks, it was 57 per cent and for smaller banks, 63 per cent. Clearly, most banks were not a great believer in project appraisal and risk management — they rushed to have a piece of the cake of corporate loans which they could not stomach. They have learnt their lessons.

While the focus of the banking system is now on the recovery of bad loans and not fresh credit, many of them are trying to learn the tricks of the trade but it will take a while to gain confidence. Besides, the bankers are also scared — of adding to the pile of bad loans and the glare of investigative agencies. A few of them were arrested and/or charge-sheeted and look-out notices were issued against them, suspecting foul play. They are going slow in project appraisal and loan sanctions. The non-banking finance companies (NBFCs) were the main drivers of loan growth in the past few years but that channel has also virtually dried up for banks as many NBFCs are not in the best of health.

Yet another factor contributing to the slow credit growth could be the consolidation drive in the public sector banking space. Ten such banks are being merged to form four. For these banks, the priority cannot be credit growth. Bank of Baroda, which has added to its size by merging two other public sector banks with itself, has clocked just 0.67 per cent growth in domestic advances year-on-year till December 2019.

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The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. 

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