Why banks won�€™t lend

Who else but Reserve Bank Of India governor D. Subbarao can best portray the condition of Indian bankers in these challenging times? And he did so with aplomb when, on a visit to West Bengal just before the second stimulus package was announced, he chose to speak his mind.

Subbarao began by saying that there seemed to be two critical reasons inhibiting Indian banks from extending credit: “First, a high weighted average cost of funds because of high interest rates on deposits, and second, concerns about credit quality, which makes the bank risk averse, particularly in lending to certain segments,” he said. Not much has changed since Subbarao made these remarks at the Kolkata Banker’s Club. The situation on the credit side, if not worse, appears to be just the same after the first stimulus package towards the end of last year.

So, what’s keeping the bankers away from writing a cheque? “The credit risk has increased due to a series of defaults in credit card, personal loans and two-wheelers,” says the CEO of a public sector bank. In fact, some of the new growth engines, like the SME sector, which were growing exponentially in the last 4-5 years, are under stress.

It’s a problem of plenty. With credit offtake subsiding, the sea of liquidity pumped in by Mint Street (close to Rs 3,00,000 crore since mid-November) is also finding its way into government bonds. While banks like ICICI, HDFC, Axis Bank and Bank of India raised capital before the stock market meltdown, many other public and private sector banks need further capital to lend aggressively. But experts are also pointing out that Indian bankers are in a much better position than their counterparts in US and Europe. “The ‘show me the credits’ based lending is beginning to look good now,” says V. Vaidyanathan, Executive Director, ICICI Bank. He adds: “Indian banks are realising that holding up cash is a drain on profitability. So credit has to flow.” There is no escape for Indian banks though—if they raise money through fixed deposits at over 8 per cent and don’t lend—it’s a loss making proposition for them.

Hemant Kaul, Executive Director, Axis Bank, says: “Banks don’t function in a vacuum. Even after all downward revisions, if we are expected to grow at over 6 per cent, Indian banks will naturally be the beneficiaries.”

The big question is, are borrowers ready to plunge in at a time when there is uncertainty all around?. The biggest lending under retail was done in the home loan segment where borrowers are following a wait-and-watch policy as property prices are expected to fall further. Similarly, India Inc. is not chasing bankers as demand for auto, cement, steel etc., has slowed down dramatically. “Liquidity needs an absorbent, and there is no better absorbent than consumer confidence,” signs off Vaidyanathan.

Bankers’ woes a) Rising NPAs: Bankers won’t lend to high risk retail customers. b) Attractive Reverse Repo Rate: Still ruling at 4 per cent, ensuring risk-free return for banks by parking surplus funds with the RBI. c) SME Growth Engine in Disarray: SME segment under stress having made unwanted expansions in the past. d) Difficult to Raise Capital: Capital market route almost shut and chances of raising long-term capital bleak. Why retail & corporates won’t borrow now A) Deposit Rates: Deposit rates are still to come down. Lending won’t pick up as cost of capital of banks is still high. b) Wait & Watch Policy: There is a general consensus in the market that interest rates will come down further as the inflation is continuously falling. c) Job Losses & Insecurity: The hiring spree of India Inc has also halted. With insecurity all around, not many will plunge into buying homes or cars. d) Corporate Expansion on Hold: India Inc has deferred expansion plans as overall demand has come down.