Banks need to do their bit to stimulate loan growth
For the first time in many years, several of India?s state-owned banks will report a double-digit drop in earnings for the three months to March 2013. The pressure on profits has been building up for some time now and while there are some one-off expenses, essentially it?s the weak top line and higher credit costs that will pull down the numbers. But if PSU banks find themselves in a mess today, they have only themselves to blame. To begin with, they lent too freely between 2009 and 2011?in the midst of the rate tightening cycle that began in March 2010 and ended in October 2011 when the repo was at 8.5%. Today, they find themselves staring at defaults because borrowers?and there are several from the infrastructure space?simply don?t have the cash flows to pay up.
Non-performing assets (NPAs) are at close to 5% for the banking system, with most of it in the public sector space?credit costs in the March quarter could be as high as 1.3% of loans. The quantum of loans recast?or loans where borrowers have been given lenient terms to repay their debt?shot up to around R80,000 crore last year with the last quarter seeing debt of R30,000 crore being referred to the CDR cell, the highest in any quarter. Most of the business is with the public sector banks.
Secondly, banks didn?t also read credit cycles carefully enough, at times mopping up money at unnecessarily high costs when they didn?t need to. For instance, loan growth, which was a strong 30% pre-October 2008, started slowing soon after the Lehman crisis and a year later had fallen to sub-10% levels, but banks failed to see the sharp deceleration and started increasing deposit rates in late 2008 and early 2009?State Bank of India (SBI) was offering 10.5% on three year money. By the time they realised there wasn?t any pick up in demand, the damage had been done; deposits were pouring in and in July were growing at over 23%, a pace that hasn?t been reached since.
In the next cycle, loan growth started bottoming out sometime in late 2009 but deposit rates were left at just 7.5-8% till July of the following year; by December 2010, credit growth had hit 26% but deposits were coming in at just 14%.
Since FY07, there has been a deceleration in the rate of growth of deposits?not too surprising since the base has been growing?while credit growth tended to fluctuate. This deceleration has left a few banks short of liabilities while the fluctuating liquidity in the system?at times in a surplus and at others in a deficit?has exacerbated the problem. Since October 2010, money has remained tight, though the shortage may not always have been acute. With the pace of growth of deposits now having slowed to decade-lows, some banks have been compelled to up rates to be able to hold on to customers.
So, at a time when banks should have been able to lower loan rates?in response to the signalling from the Reserve Bank of India (RBI)?they?re not doing so. In a sluggish economic environment, loan growth too has decelerated?though it continues to outpace the increase in deposits?and it might have helped if banks had been able to stimulate some demand. Right now it looks like loan growth could drop to sub-13% this year, a 15-year low, driven down by a sharp scaling back of corporate assets, which account for 65% of the loan book. If bankers managed to keep themselves busy in FY13, it was thanks to traction in capital expenditure resulting from projects sanctioned in earlier years. But with project approvals estimated to have dropped a sharp 60-70%, there?s little hope of doing too much business in that space for some time. Working capital cycles are stretched and consumer confidence is clearly running low?in an economy that?s expected to clock a growth of sub-6%?it doesn?t look like too many people are going to be buying homes or cars.
Since they can?t live off gains from bonds, banks need to cut rates to try and tempt new borrowers; at the same time the relief to existing customers, especially small and mid-sized firms, would go a long way in easing their cash flows. So far they have been reluctant to lower loan rates because a cut in the base rate would mean lower rates for customers across the board and would crimp margins; some have been heard saying it might be better to go back to the old regime of the Benchmark Prime Lending Rate (BPLR) in which customers were treated differently. It?s not that some borrowers aren?t getting a better deal; top corporates are able to access money, at a cost lower than the base rate, through Commercial Paper (CP). It?s understandable though that CPs or Non-Convertible Debentures (NCD) of not-so-highly rated and smaller companies would be a risky proposition. Nevertheless, while the base rate may be somewhat inflexible, it is definitely a much more transparent mechanism than the BPLR, and banks must learn to live with it. If they want to make money they had better cut rates even if it means taking a hit on their margins in the near term; else it could be a tough climb out of the trough that they?re in.
shobhana.subramanian@expressindia.com