Banks now have enough resources, but may yet stay risk-averse, lending only to the best businesses.
The Reserve Bank of India (RBI) hasn’t just given banks a bunch of money, Governor Shaktikanta Das has made loans a tad cheaper, and given borrowers a three-month repayment holiday.
Unfortunately though, the net impact of all these measures, in terms of more credit flowing to small businesses and companies, which is what is needed to get the economy going, could be very limited. The unfortunate part is that banks might still be lazy and not lend beyond a point, especially since they are not going to be earning much from their loan portfolios for three months. And, also, because the business environment is worsening.
To be sure, they will be happy to lend to well-rated customers via bonds, with the money they borrow from the central bank’s Rs 1 lakh crore TLTRO. This is important because, over the past month or so, even some top-quality companies haven’t been able to mop up affordable money. But, since the bonds can be held till they mature—and there will be no mark-to-market hit—banks would be more than willing to buy them.
However, the risk-averseness towards businesses that are stressed, or even potentially stressed, won’t go away in a hurry; it could even grow, given the environment is deteriorating fast. This paper has defended the stance of bankers as being fully justified, and any coercion on the part of government as unwarranted.
Even before the coronavirus epidemic, hundreds of companies were in trouble, with few signs of a pick-up in demand. Now, businesses everywhere are shut for the lockdown, and it could be many many months before the situation normalises; even after plants are reopened, it would take some time to ramp up the operations.
Indeed, the loss to the economy purely on account of the 21-day lockdown alone has been estimated at about 4-4.5%, or roughly Rs 9 lakh crore, and this will only exacerbate the pain.
Even after the lockdown is lifted, lending to anyone but the best would be risky. The paper that banks will buy from mutual funds or NBFCs will also likely be AAA paper because they would not take a chance with the portfolio.
For perspective, close to 1,500 companies have been downgraded in the January-March quarter—that is more than half the companies listed on the stock exchanges, and includes some marquee names. It is no longer a question of not being able to recover the money from the borrower because the legal system is difficult to navigate; it is simply that in this environment, businesses are in such poor shape that banks will recover very little if the loans go bad.
Even otherwise, right now, the demand for working capital would be modest since companies are operating at relatively lower load factors, and very few individuals would think of borrowing to buy a home, or a car at a time of so much uncertainty. Even otherwise, they are going hurt for three months because RBI has given all term loanees—home, auto, or business—a three-month repayment holiday.
This, together with the deferment on interest payments on working capital (again for three months), will also hurt revenues. It is little consolation that these assets need not be classified as defaults and no extra capital needs to be set aside.
One could argue RBI has now cleverly disincentivised banks from parking their money with it—by dropping the reverse repo rate to 4%—but, at the same time, put some Rs 4 lakh crore into their pockets. That is true. If they keep the money with RBI, and earn just 4% while paying more as interest on deposits to their customers, they would lose money. And, that is something they don’t like.
If one excludes the TLTRO and the MSF—which is just an emergency line—the amount that banks need to worry about is Rs 1.4 lakh crore, and the existing reverse repo amount of about Rs 3 lakh crore. They could, of course, quickly drop interest rates—on new savings, and fixed deposits—to bring down their costs. And, the chunky 75 basis points cut in the repo rate—down to 4.4%—will no doubt have a salutary effect on interest rates as a whole. But, the yield on the sovereign bond is still around 6%, and there are no signs yet that the government is going to stop borrowing. Unless RBI is going to subscribe to government bonds—there is that possibility—the banks have an excellent investment opportunity.
The yield may slide somewhat with the enhanced demand but, at this point, it doesn’t look like the government is going to rein in expenditure. In fact, this paper believes the government should borrow—even beyond the budgeted amounts—to fund its infrastructure, and welfare programmes.
And, if necessary, RBI could partly fund the deficit by using bonds in the primary market. It is time for the government to unleash a big fiscal stimulus, nothing else can get growth going.