A battle is won by those who are firmly resolved to win, said Reserve Bank of India (RBI) governor Shaktikanta Das at his address on Thursday at the ‘Unlock BFSI 2.0’. Das is appreciative of banks for maintaining operational continuity in COVID-19 times.
But, reading between the lines, the key message from the governor, also a former finance secretary in the central government, seems to be that banks should resume lending.
That's exactly what the government, the majority owner in state-run banks, also wants. Das wants lenders to identify sunrise sectors that have the potential to bounce back.
“Being overly risk-averse is self-defeating for banks,” said Das.
How will banks take this advice?
Let’s look at the bank credit flow scenario so far.
On a year-on-year (y-o-y) basis, non-food bank credit growth at 6.7 percent in June 2020 was nearly the same as in May 2020 but lower than the growth of 11.1 percent in June 2019.
Credit growth to agriculture and allied activities increased by 2.4 percent in June 2020 as compared with a higher growth of 8.7 percent in June 2019. Of this, credit growth to industry grew by 2.2 percent in June 2020 as compared with 6.4 percent growth in June 2019.
Within industries, credit to large industries increased by 3.7 percent in June 2020 as compared with 7.6 percent in June 2019.
Remember, these are the latest bank credit growth figures.
The RBI started infusing massive amount of liquidity into the banking system in March last week. There has been a total of 115 basis points reduction in RBI’s key lending rate since then.
The RBI has launched multiple rounds of targeted long-term repo operations (TLTRO) and special liquidity facilities. Despite all these measures, bank credit growth isn’t picking up.
As Das said, the villain in the story is high risk aversion. In an adverse economic scenario, banks become cautious in taking fresh exposure to companies. This is because the assumption is that the demand slump will stay for a prolonged period and continue to hurt the cash flows of companies. This could lead to fresh loan defaults.
Banks do not want additional non-performing assets (NPAs) to burden their balance sheets. Already the Indian banking system is saddled with huge amount of sticky loans. Total Gross NPAs stood at 8.5 percent as on March, 2020.
In its latest financial stability report, the RBI said the gross NPAs could jump to 14.7 percent by March 2021 in a worst case scenario. This means out of every Rs 100 lent by banks, Rs 14.7 will not come back.
Why banks fear bad loans?
That’s because if a loan turns bad, banks need to set aside significant amount of money to cover these losses in the form of provisions. This affects banks profitability.
This isn’t the first time the RBI has stressed on the need for banks to shed risk aversion.
In its latest annual report, the central bank said “Indian banking has to be liberated from the risk aversion that is impeding the flow of credit to the productive sectors of the economy and undermining the role of banks as the principal financial intermediaries in the economy.”
Will banks pay heed to RBI’s demand?
There are two views among banks on whether this is the right time to restart lending or not. For example, take a look at country’s two top bankers— SBI chairman Rajnish Kumar and Kotak Mahindra CEO, Uday Kotak. Kumar is of the view that this is the best time to lend but Kotak says his bank would be very cautious in giving new loans.
Those banks, with high moratorium loan book (indicating chances of high potential stress if economy doesn’t improve soon) and already high chunk of bad loans, may not heed to RBI’s request in the immediate future.
These banks, mainly private sector lenders, may continue to be extra cautious and selective in giving fresh loans.On the other hand, PSBs which are directly under the control of government, may step up lending under government pressure to boost economic growth. Both will be risky bets.