Banks may restart lending after Rs 70,000 cr boost but with caution

A significant portion of the capital provided would be tied up in boosting core capital and provisioning against bad debts which would limit the ability of bankers to lend

With the government infusing Rs 70,000 crore upfront into public sector banks, bankers are enthused about getting back to the business of lending like earlier.

However, the credit matrix has changed, and companies are now cautious. The capital infusion will give about a Rs 5-trillion liquidity boost to the banking system. However, a significant portion of the capital would be tied up in boosting core capital and provisioning against bad debts.

The immediate demand will likely come from the auto sector, which has perked up following the stimulus. The bankers are hoping the auto push and the promise to clear government dues will lift sentiment enough for the companies to go back to their drawing-board.

But it will be a slow path for companies outside the auto space.

“There is subdued demand in the economy. There are two ways: One is the push factor in which there is a lot of economic activity and that leads to a large number of people approaching the banks. Then there is the pull factor – a situation in which liquidity is sufficient, interest rates are low, and the cost of lending is cheaper. The government’s measures are intended to trigger the pull factor,” Syndicate Bank Managing Director and Chief Executive Officer Mrutyunjay Mahapatra said.

He added: “The move to frontload Rs 70,000 crore into the banking system in the form of recapitalisation will help reignite animal spirits, especially in semi-urban and the rural parts, where public sector banks’ contribution is 80 per cent.”

Big-ticket loans depend upon a host of other factors, bankers said.

“The auto should see some credit demand, followed by ancillaries. Slowly, working capital demand should increase and projects should start,” said V G Kannan, chief executive officer of the Indian Banks’ Association (IBA).

According to Kannan, infrastructure, particularly the road sector, should benefit and credit demand should rise as the government promises to clear the dues in a time-bound manner.

Credit grew at 12.2 per cent year-on-year in the fortnight ended August 2.

As of June, credit to industry rose by 6.4 per cent in as compared to an increase of 0.9 per cent in June last year. Within industry, credit growth to infrastructure, chemicals and chemical products, vehicles, vehicle parts and transport equipment, cement and cement products, and engineering accelerated. However, credit growth to basic metals and metal products, textiles, food processing and construction contracted.

With banks linking their lending rate to the repo rate, the cost of lending should come down, but the effect would be most felt in the retail segment. All banks are linking their home and auto loans to the repo rate, giving a benefit of an additional 35-40 basis points against the present rate, which anyway is cheaper than loans given to companies. If the banks have to extend the same repo-linked loans to the corporate sector, profitability would be hit.

Ashok Kumar Pradhan, managing director and chief executive officer of United Bank of India, agreed that to make repo-linked credit products sustainable, deposits rates would need to be linked to the repo rate sooner or later.

“Ideally the net interest margin for the banking sector should be around 3 per cent, whereas in the Indian banking sector it is 2.50 per cent. Banks would need to take a call on linking deposit rates to the repo rate, or else margins will be impacted,” said Pradhan.

S Harisankar, managing director and chief executive officer of Punjab & Sind Bank, said: “We may have to move to a completely externally linked deposit rates in future to make this faster. At the moment, there are challenges on that front.” 

“Definitely with the upfront recapitalization, banks will increase lending, particularly banks which are facing capital constrains,” said A K Goel, MD and CEO, UCO Bank.

Mahapatra admitted that the profitability of banks will be a “bit under pressure” due to repo-linked products but added that banks have the responsibility to expedite economic growth. “The move will put 15-20 basis points pressure on the net interest margin (NIM) of PSBs annually,” Mahapatra said.

Bankers also said the refinance facility given for NBFC loans, and the credit guarantee schemes on NBFC pools may not be a game changer in lending to the sector, but it gives an additional comfort that the bankers won’t be blamed for taking chances with the NBFC sector.

State Bank of India (SBI) Chairman Rajnish Kumar on Friday welcomed the government’s move in letting bankers take business calls without fearing getting hauled up investigative agencies if the decision goes wrong later on.

Finance Minister Nirmala Sitharaman said on Friday that the internal committee of a bank will decide which cases merit vigilance scrutiny, and which cases were genuine business decisions gone wrong.

Financing to real estate sector, however, is a different ball game that banks are not really comfortable with.

According to a senior banker, the loans will now be given to anyone who would meet banks’ strict credit appraisal process.

“Unfortunately real estate players of all hues don’t pass the basic matrix. Their balance sheets are stretched, clearances are not always in order and debt level for most are at unsustainable level. Unless the government specifically direct us to lend to that segment, we will ideally not want to,” said a senior banker requesting anonymity.

However, the banker said there is ample space left for the banks to lend to the real estate segment. The loan outstanding to the real estate sector is about Rs 2 trillion, but growing at less than 5 per cent. As a result, the real estate sector is increasingly getting dependent on the non-banking financial companies and private equity funds. The defaults in that space is rising as developers are not able to clear their unsold stock fast enough.

However, the national housing bank can come to the rescue by increasing refinancing to the housing finance companies (HFC).

“The announcement to offer more credit support for purchase of homes, vehicles and consumption goods is an extremely welcome move which does not come a moment too soon. This move gives a major liquidity support of an additional Rs 20,000 crore to HFCs and this will significantly improve the momentum of lending to cash-strapped developers by the NHB. Many developers will now be able to complete their projects stuck or delayed which were languishing due to lack of funds – thereby benefiting their buyers directly,” said Anuj Puri, chairman of ANAROCK Property Consultants.