T N Ninan: Banks that don't lend

Nationalised banks' credit growth was just 1.4% in the first half of 2016, compared with 25.9% in private sector banks

A striking piece of statistics tells us that credit given by the nationalised banks grew by just 1.4 per cent in the first half of 2016. In the same period, the State Bank group saw credit grow by a modest but respectable 9.6 per cent, while the credit growth figure for private sector banks was 25.9 per cent. Trend numbers show that the growth numbers of the different segments of the banking industry are diverging—the nationalised banks have slowed down progressively from credit growth of about 13 per cent in the first half of 2014, while the private sector banks have accelerated from 15 per cent two years ago.

So what is happening at the nationalised banks, and why have they stopped lending? Are their internal processes frozen, because no one wants to take credit decisions for fear of loans going bad and being personally hounded for mistakes made? Or are they finding it hard to get hold of credit proposals because customers have gone elsewhere? Those running these troubled banks say that it is the last; that if they get credit proposals, they will lend. This may well be a good part of the truth, but it is hard to believe it is the whole truth—not in the context of what has been going on in the past couple of years with the re-categorisation of good and bad loans.

Deposit growth rates too have been diverging. The nationalised banks have seen their deposit growth drop to less than 4 per cent, while for private banks it is now over 20 per cent. Bank customers—those depositing money and those borrowing it—seem to be shifting to the private banks. This is a trend already seen in other sectors like aviation and telecom, once the private sector offered serious competition. Unlike in those sectors, government-owned entities continue to account for the bulk of banking, but a significant shift from public to private may be under way.

There is a parallel development: much of the recent growth in credit has taken the form of retail lending to consumers, for things like buying cars. Lending to businesses has slowed down across the board. The figures for August show, for instance, that credit to industry contracted by 0.2 per cent, compared to a year earlier, while credit to agriculture grew by over 13 per cent, and personal loans grew by over 18 per cent. It is a safe bet that much of the credit growth recorded by private banks is accounted for by personal loans.

These trends tie in with GDP numbers for the April-June quarter, which said that the share of investment in fixed capital dropped sharply to 28.3 per cent, from more than 31 per cent. This is the lowest level of investment, in relation to GDP, since India embarked on its phase of rapid economic growth in 2004-05, and must make people sit up. One explanation could be that this is because industrial capacity creation had run ahead of slow-growing demand, and that investment will pick up again when capacity utilization improves; but that is unlikely to be the whole truth. The fact is that the stubborn problems with infrastructure financing (mostly the result of the public-private partnership, or PPP, model having gone badly wrong) have only partially been resolved. The Reserve Bank mentions infrastructure (along with textiles, cement and food processing) as sectors where credit has shrunk. The GDP numbers also showed very slow growth in construction activity. It seems obvious that new ways will have to be found for financing infrastructure investment, reckoned broadly to be about 6 per cent of GDP and likely to be falling because the banks that are still lending have no taste for what has been shown to be risky activity.

(Disclosure: Kotak Mahindra Bank and associates have significant shareholding in Business Standard)