Modiversary: Bad debts mount, bank credit dries up

Credit growth has crawled in the past few months and slowed to an 18-year low. Bankers and government officials would argue this is because of high interest rates, resulting in companies deferring borrowings and home and car buyers postponing purchases.

 What gets missed out is the banks’ reluctance to lend to the corporate sector, fearing that many companies may not have the capacity to repay, for they’re already burdened by a high stock of loans and several don’t have cash. Recent steps in the road sector may create some capacity for companies to exit projects and take up new ones. Experts say the key lies in speeding up implementation of stalled projects.

“Banks aren’t making efforts to lend beyond large companies,” said an infrastructure entity chief. The big worry is bad debt, which is back where it was a decade ago.

“Banks seem more worried about bad debt…and preoccupied dealing with stressed assets, resulting in lower attention to think innovatively of boosting credit,” said RM Malla, a former IDBI Bank CMD.

Although every quarter banks hope the worst is over, RBI governor Raghuram Rajan acknowledged bad loans may not have peaked yet.

“In the current fiscal, gross NPAs of banks are seen edging up by 20 basis points to 4.5% of advances, or rise by Rs 60,000 crore to Rs 4 lakh crore. Weak assets are expected to stay high at 6% (Rs 5.3 lakh crore). Bank exposure to vulnerable sectors is expected to remain high,” ratings agency Crisil said. Bankers say the problem is acute in power and coal.

High NPAs have affected profits of several large banks and made them reluctant lenders. “Unless the loan book is cleaned it’ll be tough to offer fresh debt, especially to the corporate sector,” a bank chief said.

The government and RBI have tried steps to deal with the problem, starting with a special window during the 2008 global financial crisis that only postponed the problem.

Malla suggested returning to the good bank-bad bank model, where stressed assets are transferred to a bad bank, which manages the loans and frees lenders. “It’s been tried abroad. We’ve done this with UTI and IDBI Bank. As the UTI experience shows asset value rises once the economy improves,” Malla said.

Soon after the new government took office, there was a discussion on setting up two asset reconstruction companies – for roads and power – but nothing materialized.

Government is trying to address certain structural issues, and there are issues related to certain companies which have very high debt they can’t repay as projects haven’t taken off, said ICRA MD Naresh Thakkar.

As a result, Crisil estimates suggest half the loans restructured by offering easier repayment terms are back into the stressed assets basket. The problem’s far from over.