Bank balance sheet repair: Too early to celebrate

Six years on, there are early signs that the ongoing repair work is slowly showing results. The third quarter earnings of more than a dozen banks, led by the country’s largest bank – State Bank of India – during the past week or two showed a decline in non-performing assets or bad loans and fresh slippages and consequently much higher profits . SBI Chairman Dinesh Khara, whose bank posted 62% growth in December-quarter profit 8,432 crore, appears confident that the asset-quality challenge is more or less limited, and lenders have taken steps to protect themselves from future shocks. Banks have helped recover a good portion of claims on corporates’ “dirty dozen” large accounts, which accounted for a quarter of gross bad loans at the end of 2016 and lacked provisions.

This may sound reassuring to investors, the market and a large section of banks – the government, which pumped in a few trillion rupees to liquidate several banks when their bad debt levels rose from 12% a few years ago. Was. But, more importantly, this happens when many corporates have delivered, which is the exact opposite of the 2016-17 scenario.

In fact, it is too early to celebrate the plumbing work done on dual balance sheets- corporates and banks. It is true that there has been a slight increase in credit demand recently after the first two waves of the pandemic, but this comes after negative growth coupled with lower demand from large borrowers excluding retail. More worrying is the unutilized limits for working capital and term loans reported by banks – a reflection of poor demand and credit appetite and arbitrage – with good quality borrowers raising cheaper funds from bond markets. SBI alone has undisbursed working capital limit 2 trillion and equivalent term loans which have not been availed. The bank says that usage is slowly improving.

Some of the pain, especially on the portfolio of micro, small and medium businesses, will be visible after regulatory tolerances end in March. Similarly, banks have to be careful about their credit portfolio of non-banking financial companies or NBFCs, which went to zero after banks applied the brakes due to souring of loans. It will ask for closer monitoring.

In a way it sounds like déj vu for banks. After the credit binge in the mid-1990s and a plethora of bad loans and subsequent clean-up and limited corporate deleveraging, banks faced a similar challenge. But the decline in infrastructure credit after 2005-06 created another crisis – the impact of tarnished capitalism as former Chief Economic Adviser Arvind Subramaniam termed it.

Twin balance sheets appear rosy, but given the economic damage in the previous credit boom, for Indian banks and firms, and given the learnings of the post-pandemic, the recovery may be a little off. If credit growth does not pick up in the near term, banks may be better off in the interim by setting aside more capital against their assets or following a counter-cyclical policy of investing more in digital banking to attract a new generation of savvy youth can. Customer. The government and the judiciary can certainly help by making the resolution process easier.