Lacklustre Markets Fail To Propel Credit Offtake

Political uncertainty, a slowdown in industrial production and a dull capital market are some of the factors responsible for the slower pick-up in bank credit, say bankers. Added to this is a complex credit administration structure, according to some of them.

"Credit demand depends on the perception of the entrepreneurs regarding the future," says B M Bhide, deputy managing director and chief credit officer, State Bank of India. The political uncertainty has unnerved them, who, in turn, have postponed their projects. This has dampened the demand for credit, he reasons.

Other bankers agree. "There is hardly any activity on either the project front or on imports side," says Waseem Saifi, senior manager, corporate banking, Standard Chartered Bank.

 

An additional factor cited by Saifi is the expectation in the corporate sector regarding a reduction in interest rates.

Hoping for a decline in prime lending rate (PLR), companies have postponed their investment decisions, he explains. Those companies that wanted to go ahead with their projects have been disheartened by the status of the capital market.

Finding it difficult to raise money from a dull capital market, they have either dropped or postponed their expansion and diversification programmes. Hence there is little demand for working capital on this account, says Bhide. Besides, banks have to maintain the debt equity ratio and cannot lend more to companies which have not been able to raise additional equity, says Ashish Sen, MD, Centurion Bank. Hence, even in cases where there was a demand for additional working capital, banks could not comply.

Besides, concerned over the tighter norms of the RBI for non-performing assets (NPA) provisioning, banks have become more selective in lending.

They are more particular now than before about the quality of the borrowers, says Bhide. So, even with more liquidity in the system, banks are more stringent in credit disbursement, he points out. In addition, banks now have to rely more on market, than on the government, to raise money. This reinforces the need to clean-up the balance sheet and, therefore, be selective regarding borrowers, points out Rajiv Butalia, vice-president, IndusInd Bank.

The demoralisation of bank officers following disciplinary action against some of them for their lending decisions, too, has contributed to a slowdown in credit offtake, according to some senior bankers. "Decision-making process in banks has come to a halt because of this factor," points out Bhide.

Adds Sen: A general decline in industrial production and a dull phase in the stock market have formed a vicious circle, feeding on each other. But some bankers also point out additional factors. They attribute the slowdown in credit pick-up to the last year's liquidity squeeze.

Many projects suffered time and cost overruns because of it, says A K Dam, executive director, UTI Bank.