High interest rates, subdued business environment hurting growth, say bankers.
In a throwback to the slowdown days of 2008, the loan books of many banks have started shrinking. The data of four of the nine banks which have declared their first quarter (April-June) results so far show that high interest rates and the uncertain business environment have started taking a toll.
Public sector banks have also not escaped the trend. Union Bank of India recorded a 5.6 per cent decline in loan portfolio in April-June compared to the preceding quarter. The loan book of Axis Bank, India’s third-largest private sector bank, shrunk 7.4 per cent. The figure for YES Bank is 3.6 per cent. The fourth is Development Credit Bank, whose loan book shrunk marginally. Another bank, ING Vysya, showed flat growth.
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Banks say one reason is the high interest rates. Union Bank Chairman and Managing Director M V Nair said the uncertain investment climate was holding back companies from adding capacity. This and high interest rates had impacted the demand for loans, he said.
Bankers said companies which took short-term credit in the fourth quarter of 2010-11 did not renew these loans due to the 75 basis points (bps) increase in lending rates in April-June. Banks raised base rates, the benchmark for loans, after the Reserve Bank of India (RBI) increased the key policy rate by 75 bps during April-June. The base rate of most banks is 10.25 per cent. The base rate of State Bank of India, the country's largest lender, is 9.5 per cent.
Observers said loans were likely to become dearer as RBI was expected to again increase the repo rate in the first quarter policy review on Tuesday. According to RBI data, the first three months saw loans of Rs 1.47 lakh crore, a mere 3.75 per cent increase over March. In April-June 2010, banks had disbursed Rs 1,61,991 crore.
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“Whether this (reduction in balance sheet and outstanding loans) will continue in the coming quarters will depend on the demand. It is too early to comment. The industry credit growth is expected to be around 19 per cent this financial year. We are confident of expanding our loan book at a rate higher than the industry average,” said Somnath Sengupta, executive director and chief financial officer of Axis Bank.
On YES Bank’s earnings, Mahrukh Adajania and Parees Purohit, analysts at Standard Chartered, said: “The balance sheet did not grow sequentially because of lower corporate lending opportunities in the current weak environment and also because the bank de-risked the portfolio by avoiding credit to the stressed segments.”