TeaThe banking sector in India is potentially heading into a trap. This trap is not of his own making, which is a small pity – the looming problem seems quite inevitable. A combination of coinciding factors, most of which are not under the control of the banking sector, could soon lead to a situation where banks have liquidity to lend but find it difficult to get borrowers. At a time when global growth is falling fast and India is not catching up, a slowdown in bank credit disbursement is the last thing we need.
Let’s take a look at what has been happening in the banking sector over the past decade. Non-Performing Assets (NPA) status had already started getting worse In the last years of the United Progressive Alliance (UPA) government. The real picture of indiscriminate lending during those years was not at all clear. The 2015 asset quality review of the Reserve Bank of India (RBI) really rattled the banking sector to reveal the true nature of the NPA situation.
The findings were alarming: Gross NPAs as a percentage of banks’ advances Rose 11.5 per cent in March 2018, an incredibly high level. This is the reason why the first aspect of the web in which the banking sector is falling has come to the fore. In response to the NPA crisis, the Narendra Modi government forced banks to drastically change their lending behaviour, and the latter themselves became extremely wary of lending to corporates. He started shifting his borrowings to personal loans. A thousand small loans are less risky than a handful of large corporate loans, it argued.
Although now the situation of NPA is much better and banks are once again profitableThe trend of under-lending to the industry continues.
Changing role of banks
in this way analysis As shown by ThePrint, the share of credit to industry as a proportion of total credit by banks and financial institutions is shrinking. The share of loans in the personal loan category is increasing proportionately. On the other hand, companies are increasingly raising their money from the debt market by issuing bonds and debentures instead of taking loans from banks and other financial institutions.
The role of banks as a source of private sector funding – mostly used for capital investment – is changing. Banks are now driving a different engine of growth: personal consumption. There are mainly two reasons behind this. First, income has definitely gone down during the pandemic. While many have faced a one-time pay cut, even those who have seen it reversed have faced a drop in their real income as inflation eats away at the value of their money. And hence, personal consumption has been increasingly financed through debt.
As far as banks are concerned, while the recent festival period and high demand for cash means liquidity in the system has been temporarily tight, it should soon return to the recent normal where bank liquidity In terms of ease. Government investment – a key driver of liquidity – is likely to increase in the fourth quarter of this fiscal as it usually does. The impact of the festive season on cash withdrawals is also likely to end from January.
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Rising inflation and interest rates
The second problem, which has now taken root well, is inflation. The Modi government is turning a blind eye by saying that most of India’s inflation problem is imported. That is, global inflation, especially in energy prices, is spreading in India and leading to uncomfortably high prices here too. In fact, the gravity of the problem is such that RBI’s Monetary Policy Committee (MPC) recently prepared a draft. Letter Explaining to the government why the upper limit of 6 per cent for inflation was breached for three consecutive quarters (or nine months).
Although the contents of the letter will remain secret as long as the government believes so, they are unlikely to be surprised. Inflation in India is high due to skyrocketing oil and gas prices driven by the war in Ukraine and the depreciation of the rupee against the dollar.
However, this means that central banks around the world—including the RBI—have had to sharply increase their interest rates. Last week, the US Federal Reserve raised interest rates for the fourth time in a row 75 basis points (bps). Bank of England, too, last week raise your rates By the largest amount in 30 years, and the European Central Bank raised rates by 75 bps in October (the same as in September). For the uninitiated, one basis point is a standard measure for interest rates and the other a percentage. So, 75 basis points equals 0.75 percent and 100 basis points equals 1 percent.
The RBI, for its part, has increased rates by 190 bps in four hikes from April 2022. The global scenario and persistent inflation mean that some hike is likely in the near future, though not as drastic. This means that loans have become more expensive, while deposits have become more profitable. In other words, it’s a good time to put money in the bank and a costly affair to take out a loan.
So, taken together, what do we have? Banks are finding that their avenues of lending are narrower than before as corporate credit is no longer a focus area. Instead, they are focusing on personal loans. Banks also have comfortable liquidity, so they have money to lend. However, interest rates are rising and loans are becoming more expensive. With income still under pressure, people who typically take out personal loans may be increasingly feeling the allure of higher interest rates and leaving money in the bank.
Unfortunately, there doesn’t seem to be a way out of this conundrum. Growth isn’t strong enough to encourage corporates to take bank loans, and inflation isn’t going anywhere, so interest rates will remain high. This means that the engines for personal consumption will not catch fire any time soon. This is disappointing news for the Indian economy. It is expected that Finance Minister Nirmala Sitharaman and her team can think of something new in the upcoming budget.
Thoughts are personal.
(Edited by Hamara Laik)