Banking on the Centre

Four quarters after the Reserve Bank of India’s asset quality review, nothing in the recent performance reports of banks suggests that the NPA problem is bottoming out. Since the December quarter, over ₹3 lakh crore of bad loans have been added to the system. True, the sheer quantum of such loans indicates that bad loans are unlikely to balloon from hereon. But even as the volume of quarterly slippages has moderated from a whopping ₹1-1.5 lakh crore to a more conceivable ₹50,000-odd crore over the last two quarters, provisioning requirements have not fallen substantially and are unlikely to drop even in the coming quarters. Ageing of non-performing assets, currently over ₹6.7 lakh crore, could lead to significantly higher incremental provisioning this fiscal; the State Bank of India’s notable increase in provisions in the September quarter despite a meagre growth in its bad loan book, only indicates the risks that loom in the sector. Weak core earnings on the back of muted credit growth has left the already scarce capital base of public sector banks bearing the burden of huge losses on account of steep provisions. The front-loading of capital infusion by the Centre in the current fiscal, rather than aiding growth, will most likely end up funding banks’ losses. Even a few private lenders such as ICICI Bank and Axis Bank which have a relatively higher exposure to core sectors, have felt the heat and have been trimming their exposure aggressively to these segments.

This brings us to the larger issue of banks turning averse to project lending and taking fresh exposure in core sectors such as infrastructure and power. State-owned banks have been at the forefront, providing the necessary funding to infrastructure projects. But hoping to ape the business models of private banks that have mostly gone unscathed, PSBs have been increasing their exposure to retail loans while cutting back aggressively on corporate lending. This has left large projects starved for funds. Even if big ticket fire sales of Indian corporate assets help ease bad loan pressure and strengthen banks’ balance sheets, the larger concern is whether banks’ appetite to lend to large projects will return.

Rather than looking to banks to fund projects, the Centre will have to look at alternative channels such as bond markets. While the RBI only recently came up with a slew of reforms for the bond market, it is not enough to supplement the funding gap. To break the economy and bank credit growth out of this chicken-and-egg situation, the Centre will have to step up its capital spending. The bonus from the demonetisation scheme — which add to the Centre’s coffers via additional disclosures — should be used to increase capital spends and boost consumption. With the performance of PSBs likely to be on shaky ground for some quarters to come, direct spending by the Centre will have a quicker impact on economic activity than recapitalisation which has done very little to spur growth.

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