Lend Diligently: Knives Out Again for Indian Banks


Toronto: Lend Diligently: Knives Out Again for Indian Banks. After weathering the storm of NPAs, the Indian banks have posted positive results this year. The success appears short-lived as the banking, financial services and lending landscape face massive challenges. The pandemic induced loan restructuring provided short term relief—the Corporate and MSME sectors reel under the disrupted supply chain from China. The double whammy of high input costs due to inflation and interest rate hikes thrust by the Ukraine war. Retail is the new entrant to the stressed asset list. The NPA knives are out again for Indian banks so banks should lend diligently.

Despite an optimistic RBI report, India’s banking sector, though sufficiently capitalised and well-regulated, has an Achillies heel which hardly responds to the monetary balm. The IBBI and the Bad Bank initiatives have a limited response. The financial and economic ambience in the country is still stabilising. Banks’ credit, market, and liquidity risk-taking capacities require a sturdy shape and resilience. Banks have withstood the global downturn due to the RBI quantitative easing handholding and suppressed appetite for credit by corporates.

The Indian banking system consisting of 12 state-owned banks, 22 private, 46 international, 56 regional rural banks, 1489 urban cooperative banks and 100,000 rural cooperative banks and cooperative credit institutions, needs constant vigil. Total loans across the banking sector increased to US$ 2.48 trillion (Rs.185.68 lac crores) in FY21 comprising US$ 1,602.65 billion ( Rs.119.79 lac crores) in the public sector and US$ 878.56 billion ( Rs.65.89 lac crores) in the private sector. According to India Ratings, credit growth may hit 10% in 2022-23. Most banks have budgeted for handsome credit growth, but the evolving geo-political situation is creating hurdles., especially for accounts that survived due to extensive restructuring. Banking in India is vast but capital-starved. It remains susceptible to global changes despite being multifaceted.

There is a lingering fear of inflation due to the oil and food crisis. India imports edible and fuel oil apart from pulses. Gold is another significant component of imports. Prices of all these commodities are going up by the hour clock. The cascading effect of inflation threatens to stress the Corporate and Individual budgets and performance. If the war prolongates, a disorder will creep into banking assets, pulling banks back into the quagmire of burgeoning NPAs. Credit dispensation into vulnerable and susceptible sectors shall make or mar the future. Indian banks, presently, stand at a threshold; knives are out earlier than expected.

Loans recast under the first restructuring in 2020 will see the moratorium period close between March and September 2022. Restructured in August 2020, borrowers exhaust a two-year moratorium period to tide over economic difficulties brought on by the pandemic. During this time, they did not repay. The banking sector restructured about 1.0% of the advances under the first round. Another 1.5% were restructured by November 2021. According to ICRA, banks restructured Rs 1 lakh crore worth of loans in the first round; another Rs 1.2 lakh crore in the second round. The average restructured loan book for banks is estimated to be 3% for the banking sector.

Taking the loan book at Rs.185.68 lac crores,3% of the sum worth Rs. 5.57 lac crores is on the verge of becoming NPA taking the stressed asset level beyond a whopping Rs.13.0 lac crores. The recovery of the stress of such size will consume the entire bandwidth of banking acumen. There will hardly be any time left to lend new projects.

The SBI Chairman stated that banks could fulfil India’s ambitious goal to become a $5-trillion economy with an additional $1 trillion (Rs. one lac crore) debt to match developed market trends. India’s debt and GDP ratio stood at 89.6%. In Japan, it is 257%, China 250% and the USA 134%. On average, it is around 200 in the developed markets. So there is considerable scope for banks to contribute to the country’s journey to becoming a $5 trillion economy. Banks should lend big towards infrastructure and industrial production.

Banks’ contribution to growth alone would make or mar the economy’s chances to scale up to $ 5.0 trillion. Therefore, it is expedient to overcome the loan recovery pre-occupations and diligently lend another Rs.1.0 lac crore. If banks become risk-averse, the coveted goal shall not be accomplished by 2027 and may shift to 2030

Hargovind Sachdev



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