Until the economy starts gaining momentum, the core business of banks will remain under pressure.
By reducing the reverse repo rate to 4 per cent the central bank is making it unexciting for banks to park their surpluses with it. And by trimming the cash reserve ratio by 50 basis points it is leaving them with some extra money. But the challenge before banks now will be to find good credit risk to lend to. That may not be so easy because the economic environment is harsh, especially for the SME sector. Sure, banks do need to lend, but forcing PSU banks to lend simply to ensure that money is spent may hurt them in the long run.
Also, unless the economy as a whole revives, some of the lending may just amount to throwing good money after bad. Already, for the past six months or even longer, banks have been the main lenders to the system because both the debt markets overseas and the equity market have been out of reach. Moreover, internal accruals have been under pressure.
In a tight money market, some banks have been shying away from lending, anxious that the cost of deposits should not shoot up. Thoseworries should ease somewhat with the extra money they will have. But banks have also been cautious because there are concerns about rising non-performing loans(npls)—and that’s a valid concern at a time when the economy is slowing down.
Now that the ECB rules have been eased, companies may now get loans in the overseas markets and to that extent, the pressure on banks to lend will be less. However, for banks to prosper, the economy needs to start gaining momentum. It’s not clear how soon this will happen. While lower interest rates should help, no one is too sure about how good the stimulus package is and how soon it will kick start growth.
As experts say, the spend on infrastructure(through IIFCL) could take its time coming and there aren’t too many direct sops for exporters. Also, benefits for the housing sector are fewer than expected. With interest rate softening, banking stocks have rallied over the past month or so —the BSE Bankex has risen 28 per cent compared with a gain of 14 per cent. They may well rally again. But their core business could continue to be under pressure for some more time.
