Sharp jump in provisioning for next round of NPAs means reviving credit growth tough; low deposit-growth worrying, too
Banks have now been cleaning up their balance sheets for close to three years after the asset quality review process started in 2016. It was expected that, by now, most of the bad loans would have been identified and adequate capital set aside for these in the event the money cannot be recovered from the borrowers. However, the sharp jump in provisions made by a clutch of state-owned banks for loan losses in the March quarter—both existing and potential—to over Rs 50,000 crore is cause for concern. Moreover, some private sector banks too appear to be setting aside more capital for potential loan losses than one had estimated. The rising provisioning suggests the NPA cycle may not have have ended yet. After IL&FS and Jet Airways, there could be other big exposures that could turn toxic. Also, bankers have been red-flagging stress in the real estate sector and MSME space, too. This is a big concern because, while private sector banks should be able to access the markets for equity capital, the state-owned banks may not have adequate growth-capital to fund businesses and consumers in FY20 unless the government comes to their rescue. This is despite the fact that capital adequacy norms have been eased.
The other big concern is the sharp deceleration in credit growth over the last six months, essentially the shortage of affordable credit. The near-collapse of NBFCs and HFCs has resulted in the flow of credit weakening. A look at the loan data shows that banks, too, have been lending a lot less to certain segments. For instance, loans to the consumer durable segment contracted by 68% year-on-year (y-o-y) in March. While some of this could be attributed to lack of purchasing power, it is also a fact that loans that were being offered were not attractive enough. If growth is not to be stifled, businesses must have access to adequate affordable credit. At this point, banks are finding it hard to mobilise deposits, partly because consumers’ savings are thinning as their incomes are growing slowly, or are not growing at all. Deposits are now growing at sub-10% y-o-y, but to support credit growth of 13-14%, CRISIL estimates the asking rate of annual deposit growth would be significantly higher at about 10% in FY19 and FY20, compared with around 6% in FY18. The growth in FY19 has been a little over 8%, with outstanding deposits now at close to Rs 126 lakh crore. Unless the economy rebounds, and, therefore, consumer incomes get a boost, it is unlikely banks will be able to attract deposits at a faster pace.
It is something of a chicken-and-egg situation. But while some of the currency-in-circulation should come back to the banking system after the elections, over the longer term, banks need to be able to mop up deposits at a quicker pace, else lending will be constrained. Also, liquidity measures being used by RBI—including open market operations—will help. But, unless the government spends far more than it has budgeted, it would be hard to create jobs and boost consumers’ incomes and, thereby, savings. The other option, of course, is to attract more foreign flows into the corporate bond market.