Fix corporates first to lift credit flow, says Viral Acharya

RBI deputy governor wants companies to take steps to reduce debt

Reserve Bank of India (RBI) Deputy Governor Viral Acharya said without fixing the corporates, it would not be possible to get credit going in the economy.

The deputy governor made this comment while discussing what exactly could have crippled the economy— was it lack of credit supply or lack of credit demand?

"Is it the bank lending channel which caused the economy to slow down, because the supply of credit from banks affected by non-performing loans is not too high? In our case, in a large measure, it's probably the public sector banks which have ended with the large proportion of stressed assets which are under-provisioned for, or is it the fact that it is really about the underlying corporates? Is it that banks would be happy to lend, but there is just no demand from corporates to borrow because they are heavily indebted?" Acharya asked, while making a presentation on Economic Data Generation and Information Analytics at the Indian Chamber of Commerce Banking Summit here.

In the corporate distress channel, most companies were not healthy, he said. So without fixing corporates, it would not be possible to get credit going in the economy. "So if you fix the banks, that, by itself, will not create credit. You actually need to fix the underlying corporations, because there might be excess capacity in the sector that you might have to clear before you can actually see a pickup in demand," he explained.

Acharya, who presented a research paper on the anatomy of a business cycle, pointed out that bank credit and real cycles were highly correlated. The cycle of credit growth from 2008 was much sharper for private sector banks. "But for public sector banks, it was very high to start with and then both declined," he said.

The RBI deputy governor said around 2015-16, non-performing assets (NPAs) were picking up and restructured assets were coming down — just mechanically coming from the fact that banks hadn't marked as NPAs which they should have, and the asset quality review undertaken by the RBI effectively forced them to do this.

Capital infusion into banks won’t resolve the banking sector’s bad loans crisis until companies take steps to reduce debt. The RBI is seeking to strengthen the banking system through measures, including merging weaker banks and pushing to privatise some state-run lenders, as it ramps up efforts to resolve the world’s highest stressed-asset ratios. 

Banks would be happy to lend but there is no demand from corporates as they are heavily indebted, he said. “If you fix the banks by simply putting capital into them or you simply provision better at the banks, so that they get restoration of their lending capacity, that by itself is not going to create credit.”

Earlier this month, the government amended the Banking Regulation Act to enable the RBI to order lenders to initiate insolvency proceedings against defaulters, and to create committees to advise banks on recovering non-performing loans. Stressed assets have reached “unacceptably high levels” requiring urgent measures to resolve them, according to a statement on the Gazette of India website.

Stressed assets, which include bad loans, restructured debt and advances to companies that can’t meet servicing requirements, have risen to about 17 per cent of total loans, the highest level among major economies, data compiled by the government showed.

(With inputs from Bloomberg)