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No Quickfixes; The Pain Will Continue

A decade down the line, bank loans will not be sole financier of the corporate world

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It was more of the same in fiscal 2016 for the banking industry. Balance sheet growth continued to slow down – Mint Road data shows the pace was 7.7 per cent compared to 9.7 per cent in fiscal 2015. Dud-loans or bad loans – in the main on the books of state-run banks – and provisioning for the same lead to further drop in appetite to vend loans; the pressure on capital added to the misery. Net result – a 530 basis fall in the growth in credit given out to 2.1 per cent.

What we saw in the credit markets in fiscal 2016 was the deepening of a trend that has been going on for almost seven years now. A lack of confidence in India Inc., not much by way of capacity addition, stress on balance sheets, poor earnings growth; in turn, has resulted in a flight to safety on the part of banks. During this period, every banking group by colour of capital – state-run, foreign and private – has held back; the last two have shown stomach for credit – on a selective basis, that is. But it is what state-run banks do or don’t that matters as they have a 72 per cent share of the business.

Mint Road’s FSR or the Financial Stability Report (December 2016) throws light on the situation post end-March 2016. It says the asset quality moved southwards still. Gross non-performing advances went up by 130 bps to 9.1 per cent between March and September 2016; it pushed the overall stressed advances ratio by 80 bps to 12.3 per cent. The report noted, “...given the higher levels of impairment, banks may remain risk averse in the near future as they clean up their balance sheets and their capital position may remain insufficient to support higher credit growth”.

You will know how bad the situation is when the June-FSR 2017 is released. Point to be noted: The Reserve Bank of India’s (RBI) ‘Report on Trend and Progress of Banking in India (2015-16)’ captured the asset quality review; the FSR did not capture it!

In fiscal 2016, interest income (non-interest, too) was badly hit due to poor credit growth. Operating expenses improved due to a moderation in the wage bill. But provisions and contingencies surged due to a sharp deterioration in asset quality. We saw a 60 per cent drop in banks’ net profits, though at the systemic level net profits remained in the positive zone. The Ujwal DISCOM Assurance Yojana (meant to help both utilities and banks) led to lower yields and adoption of the marginal cost lending rate in falling interest-rate scenario came to bite banks, state-run banks in particular – because the lower costs of funds could not offset the decline in the net interest-margin.

As for the better rated borrowers, a few went over to other windows to avail of finance – cross-border loans, corporate bonds and commercial papers. But as to whether the slump in credit offtake to a six-decade low of 5.08 per cent (10.7 per cent in 2015) in the fiscal gone by meant India Inc. did so in a wholesale manner has not been settled – there is no consolidated data as on date to show this was indeed so the case (this writer feels it is unlikely as credit demand was abysmally poor). But what is clear is, a decade down the line, we will see more of what is par for the course in the matured financial markets – disintermediation in its truest sense; bank loans will not be sole financier of the corporate world.

We are now two years away from the implementation of Basel III capital. Indian banks will need tonnes of capital. On 5 June 2013, RBI’s then governor, Duvvuri Subbarao, estimated additional capital requirement at Rs 5 lakh crore, “of which non-equity capital will be Rs 3.25 lakh crore, while equity capital will be Rs 1. 75 lakh crore”. In his first Budget speech of July 2014, finance minister Arun Jaitley put it at Rs 2. 40 lakh crore. The exact amount depends on a range of factors: credit growth, its quality, dud-loan provisioning, and the technicality under Basel III. You may well see a further revision of these numbers as we go ahead.

Now, join the dots – what you get to see is not a pretty picture.

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