The popular outcry is that Indian economic recovery is being halted by the fact that lending rates have not come down enough in India today. Bankers are seen as the primary villains. They are being conservative in their lending and are taking advantage of their position as sole credit providers to industry these days, by charging relatively higher interest rates. People are pointing out that inflation rates are low and real interest rates therefore are that much higher.
Bankers are also accused of being inordinately careful in helping out companies that are getting into trouble. The national consensus, from all industry associations, large and small companies, and academics is that banks, especially in the public sector, should be instructed to lend quickly and at lower rates even to those companies that are getting into trouble.
In the circumstances I believe a discussion is warranted on the demands that are being placed on public sector banks (PSBs). It has taken the Indian PSBs a full decade to get to where they are today. Back in 1999 PSBs used to have a return on assets (RoA) of about 0.5 percent, high NPAs (as high as 8 percent), low employee productivity, and used almost no technology. Today PSBs have improved on all these important dimensions?public sector employee productivity has improved six times since 1999, RoA are above 1 percent, and NPAs for the industry are below 2 percent. Most banks have invested heavily in technology and have almost universally rolled out core banking solutions. Many today are migrating to the next level. All this is allowing them to improve their service levels and their product suites. While they have been somewhat more conservative than their private and foreign counterparts, they have robust balance sheets. The demand for them to bail out the failing sectors today therefore is tempting but dangerous.
Our entire financial sector is largely unaffected by the global financial crisis. This is due to ?conservative? or ?effective? regulation by RBI limiting bank exposure to realty and capital markets but equally due to the innate conservatism of PSBs built over many years of living with the three sisters?CVC, CAG and CBI. These bankers are not the ones making seven digit salaries. PSB performance orientation has been superimposed on them due to their listing and partial private ownership of their equity. It does seem entirely cynical then that they are being asked to bear all the load of the current crisis. Already a lot has been done in terms of easier restructuring norms and lending rates. The criticism of high bank PLRs is a red herring for the uninitiated. Banks are keeping PLRs high as a way to manage a few administered rates (ie Rs 2 lakh loans) at levels that are not heavily loss making. Good companies get rates below PLR. It is true that SME credit is tight and expensive. In fact, SMEs are suffering from an increase in trade credit as their larger partners are slowing payments to them. But actual rates to industry are competitively determined.
As much as industry believes credit is tough to come by, and expensive, bankers are also looking for good opportunities to lend to, with reverse repo rates down at 3.5 percent. Good companies are still sought after. Asking banks to lend to risky sectors and companies (SME for example) at lower interest rates is not right. The government should provide them with funding for bailouts like they did when they wanted to provide relief to farmers with the agricultural loan waivers. We need to be careful in what we are asking for least we don?t go overboard and create a sick banking sector which takes a decade to sort through. Collectively we must remember that the perverse incentives that get created when standards are weakened take a long time to mend in banks.
The author is managing director, The Boston Consulting Group. These are his personal views