State Bank of India chairman had said sometime back there was very little demand for credit. This is, in part, true. Given that there are not too many projects coming up and production levels have been stagnating across a host of sectors, companies don’t really need too much fresh or additional working capital; the sanctioned limits are more than sufficient.
In what can only be described as a worrying and unfortunate situation, loan growth is crawling at around 7% while banks are parking large sums—of anywhere between Rs 3-4 lakh crore—in the Reserve Bank of India’s reverse repo window. In other words, they are content to leave funds lying with the central bank rather than grow their loan portfolios. This is lazy banking at its worst. While banks have been growing their retail books possibly because they believe individual borrowers are safer—home loans, for instance, are backed by sound collateral—they are becoming increasingly reluctant to lend to companies. The first half of FY20 has seen a sharp fall in credit to the commercial sector. In fact, they are even willing to give unsecured loans to salaried individuals, but corporate loan exposure continues to slow with only the very best borrowers able to access money. This is worrying because the economy cannot recover fast enough if banks are hesitant to lend.
State Bank of India chairman had said sometime back there was very little demand for credit. This is, in part, true. Given that there are not too many projects coming up and production levels have been stagnating across a host of sectors, companies don’t really need too much fresh or additional working capital; the sanctioned limits are more than sufficient. However, it is also true that banks are unwilling to lend to companies that don’t have such a good rating, but where the risks are evenly balanced and the funds could be of use to the company helping it do better. This reluctance comes from fear of being criticised, penalised and even harassed if something was to go wrong. The fear psychosis is not hard to understand; bankers have been chastised for the large loan losses—some of the top executives including CEOs have been badly treated and harassed without even a fair hearing. Indeed, the outrage on the part of the government would appear to be selective with some bank CEOs having got off lightly whereas others have been penalised.
It is true that the large quantum of non-performing assets (NPAs) that the banking system reported in the last years—of close to Rs 12 lakh—were essentially due to non-repayments of loans by companies. While some of it was the result of poor risk assessment on part of the bankers, a good part of the loan losses were caused by a turn in the business cycle, which few could have predicted. Yet another reason was that banks were compelled to lend to long gestation infrastructure projects, for which they were not suited given their liabilities are of a shorter tenure. However, the government needs to address the risk aversion and must reassure bankers they will not be hauled over the coals every time a loan goes bad. When investigative agencies—EoW etc—are asked to probe CEOs and they are prosecuted, bankers cannot, but be scared. The government needs to tweak the laws and get the investigative agencies off their backs. This is not to suggest bankers don’t need to be honest and diligent, they do, and the necessary checks and balances need to be in place to ensure this. But, an environment in which lenders are afraid to lend to companies that may not have such a good rating is certain to destroy the economy.