Is the sparkle returning? Banks are now better placed to handhold India Inc

The growth instinct appears to have taken root, and banks are now better placed to handhold India Inc

The change in sentiment and outlook is beyond the feel-good factor. Many companies are seriously discussing investment proposals with us,” says Dinesh Khara, chairman of State Bank of India (SBI). He has reasons for being upbeat.

Last week, the bank posted its highest standalone quarterly net-profit — Rs 7,626 crore for the second quarter, up 67 per cent year-on-year. Provisioning for bad loans fell to Rs 2,699 crore, down 52 per cent, even as gross non-performing assets (NPAs) improved to 4.9 per cent, from 5.32 per cent in the preceding quarter. Better still, “SBI is in discussions for Rs 1.15 trillion in loans to borrowers, both for working capital and term credit. And this is over and above the Rs 4.6 trillion which we have already sanctioned,” adds Khara.

Unutilised working limits are expected to slide to 30-35 per cent, from 50 per cent in the current fiscal. Khara believes that “the production-linked incentive system is going to attract investments. And it is time to take advantage of the global supply-chain diversification”.

Lift-off time

According to Reserve Bank of India data, bank lending rose Rs 7,283 crore until September 24 (up by 0.1 per cent), compared to a contraction of 1 per cent (or Rs 99,280 crore) on a year-to-date (YTD) basis in the corresponding period of 2020-21. Outstanding bank credit was Rs 109.56 trillion on September 24. What stands out is that this positive credit growth has happened despite the debilitating impact of Covid-19’s second wave. Remember, too, that in a normal year, YTD credit turns positive in August-September, ahead of the busy season which begins in October.

Says Rajkiran Rai G, managing director and chief executive officer of Union Bank of India: “The balance sheets of large companies are strong and many of them are discussing proposals in textiles and steel for brownfield expansion. There are proposals in commercial real estate, especially office space.” He expects the bank’s corporate loans to grow 6 per cent by end-March 2022. Its sanction pipeline is at Rs 20,000 crore.

Jefferies Equity Research analysts Mahesh Nandurkar and Abhinav Sinha state in a note that “conditions are ripe for a repeat of a 2003-10 style upturn.” Housing, bad loans and the corporate profitability cycle have convincingly turned positive. The duo feels that corporate leverage is at a cyclical low. The broader capex cycle has not turned yet, but it usually follows the housing cycle with a lag. Interest rates will likely move up, but this was the case over 2003-10 too, and a spike in rates should not be a worry in the initial stage of the cycle.

According to Madan Sabnanvis, chief economist at CARE Ratings, “it does seem that the economy is showing a turnaround, which is looking quite encouraging presently. Will this be sustained or not is a moot question, but for certain, things are looking up.” The Purchasing Managers’ Index (PMI) for manufacturing rose to 55.9 in October, from 53.7 in September. The PMI for services has come in at a decadal high of 58.4, up from 55.2 in September.

“In fact, one can say with a fair amount of confidence that this month (November), PMI can be even better,” says Sabnanvis. Goods and Services Tax collections in October were Rs 1.31 trillion — lower than a surprising Rs 1.4 trillion in April (the first month of the second lockdown), but the highest since July. Of course, high oil prices and their pass-through effects on inflation will need to be watched, though last Wednesday, the Centre slashed the excise duty on fuel — by Rs 5 on petrol and Rs 10 on diesel — with effect from November 4.

The bad-loan factor

CRISIL expects banks’ gross NPAs to rise to 8-9 per cent in the current fiscal year, well below the peak of 11.2 per cent seen at the end of fiscal 2018. Covid-19 relief measures such as loan restructuring and the Emergency Credit Line Guarantee Scheme will help limit the rise. But, with 2 per cent of bank credit expected to be under restructuring by the end of this fiscal, stressed assets — consisting of gross NPAs and loans under restructuring — should touch 10-11 per cent. 

Krishnan Sitaraman, senior director and deputy chief ratings officer at CRISIL, senses residual pain from retail, as well as micro, small and medium enterprises, which together account for 40 per cent of bank credit: “Stressed assets in these segments are seen rising to 4-5 per cent and 17-18 per cent respectively, by this fiscal-end. The numbers would have trended even higher, but for the write-offs, primarily in the unsecured segment.” 

Sitaraman is seconded by Tarun Bhatia, managing director and head of South Asia (forensic investigation and intelligence) at Kroll. “I am not sure if the worst is over, and my estimate is that NPAs would be in the range of 8-10 per cent by the fiscal year-end. Hopefully, the impact of Covid’s third wave will be limited,” says Bhatia. “However, small businesses have suffered immensely and quite a few of them may not be able to recover, putting pressure on NPAs, with increased risk in textiles and EPC (engineering, procurement and construction).”

R K Bansal, managing director and CEO of Edelweiss Asset Reconstruction Company, has a different take: the National Asset Reconstruction Company Ltd (NARCL) will be the game-changer. “The biggest advantage of the NARCL is that it is an aggregator. That helps a lot, as a consolidated view can be taken on a stressed firm.” That said, he also points to the fact that “not many restructurings are happening under the RBI’s June 2019 circular, because of stringent conditions and differences over inter-creditor agreements.”

Will there be a sense of urgency on the part of state-run banks to transfer assets to ARCs in a big way? This has to be seen in light of the arrest by Rajasthan Police last week of Pratip Chaudhuri, a former SBI chairman, in a decade-old bad-loan case. State-run banks have been starved of capital for a while. In the past they have been impacted by limited capital allocation from the Centre and the inability of many to raise capital from the bourses.

“They always had an option to sell NPAs to ARCs, but the disconnect in value was a big challenge,” says Bhatia. He is hopeful that with the setting up of NARCL, there will be some respite. Further, with a sovereign guarantee available for the first five years towards security receipts issued by NARCL, there will be increased pressure on state-run banks to sell NPAs rather than knock on the government’s door for capital.

The short point is that the country may just be on the cusp of something big, but could still end up making a hash of it all.