Industry’s immediate concern is the market and not availability of bank loans. The credit growth has naturally slowed down. Banks have had to reduce lending rates following the RBI rate cuts. Data from RBI shows that the monthly weighted average lending rates on fresh loans slipped 28 basis points for commercial banks between March and May. The Q1 bank results (FY21) suggest that most banks are in distress. While a stake sale gain from SBI Life during the April-June period boosted SBI’s bottom line, the bank made much higher provisioning at Rs.12,501.30 crore as against Rs 9,182.94 crore in the same quarter last year. For HDFC Bank, the largest private sector lender, a three-fold jump in treasury gains helped save the situation. HDFC Bank clearly sees an uncertain future.

The government is prodding bankers to push loans to micro, small and medium sector enterprises (MSMEs), farmers, micro-finance institutions and non-banking finance companies, which were provided extra thrust in the union finance minister’s Rs.20-lakh-crore special package to arrest the economic downturn in the wake of the pandemic. The FM promised, among other things, easier loans for MSMEs and collateral free credits up to Rs. three lakh crore. For stressed MSMEs, the FM further announced Rs 20,000 crore liquidity to benefit around two lakh MSMEs. The government also decided to infuse capital of Rs 50,000 crore in MSMEs for their expansion. It changed the definition of MSMEs which will allow them to get the facilities even with higher investment in them. All these are absolutely okay as long as the government holds some kind of guarantee against such loans. It may not be right to provide verbal assurances to bank managers that they won’t be taken to jail ‘for taking a decision in the course of their duty.’ Such an assurance could only give a wrong signal to both borrowers and lenders and encourage financial corruption and fraud.

Incidentally, banks’ bad loan ratio in the MSMEs segment has been constantly rising. It stood at 12.5 percent as of January 2020, a report by TransUnion CIBIL and SIDBI showed. While the NPA ratio in micro segment was 9 percent, the small and medium segments showed higher proportion of loans going sour at 11 per cent. Among lenders, more cautious private sector banks exhibited NPA levels in the range of three to five percent in the MSME segment whereas the NPA level of public sector banks increased from 18 percent in December 2018 to 19 percent in December 2019. Unfortunately, much of the MSME woes came from massive dumping of imported products, including such items as earthen lamps, toys, fabrics, garments, plastic products to chemicals, small machinery and parts, electrical items, electronic products and home decorative. Most MSMEs found it almost impossible to match the prices of such cheap imports and, in the process, languished in the market. The government did little to protect the market for local MSMEs. Ironically, it now wants banks to protect the market-starved MSMEs by giving more loans.

It may be worth noting that the recent RBI stress test has suggested that the ongoing pandemic crisis could push Indian banks’ gross bad loans to their highest in nearly two decades. Pressures from the virus and lockdowns are likely to significantly push up bad loans for the banking sector. RBI’s Financial Stability Report (FSR) for July, 2020, spoke of a “very severe stressed scenario” for the banking sector. The gross bank NPAs could rise to as much as 14.7 percent of total loans by March 2021. RBI’s stress test covered 53 scheduled commercial banks. As of March 2020, the ratio stood at 8.5 percent of total advances. In its June 30 report, Standard & Poor's estimated that bank gross NPAs could rise to as high as 13-14 percent. The RBI stress test results show that public sector banks could see their gross NPAs rise to 15.20 by March 2021 from 11.30 percent a year earlier in the baseline scenario. In the "very severe stress" scenario, this could go even as high as 16.3 percent. Private and foreign banks too would see a spike in their bad loans because of the worsening macroeconomic factors.

Interestingly, the prime minister himself wants the country’s banks and financial institutions fund more “bankable projects,” underfed by non-performing assets (NPAs) generated in the past. He even promised to fully back banking industry executives helping such an initiative. The statement came as a highly unexpected one from such a high level to banks at this critical market situation. It was quite confusing as well. Banks are supposed to generally fund only bankable projects. Deposits, which banks use to lend to make higher interest income, are considered as liability of banks. And, that is why, in normal circumstances, bank management can’t be spendthrift with depositors’ money. Banks are supposed to use depositors’ money and other resources built with the help of that carefully and not wastefully. Commercial banks are not to be mistaken as development banks. According to the conditions mentioned in RBI’s stress test, the gross domestic product (GDP) could contract 4.4 percent under the baseline scenario. In the “very severe stressed” case, the contraction could be as high as 8.9 percent. The banking industry would also see erosion of capital as banks would be required to provide more against defaulters. Banks need to be more careful about lending under the present circumstances. (IPA Service)