Going retail

The Reserve Bank of India’s latest Financial Stability Report (FSR) reinforces the message from its recent Trends and Progress of Banking study to paint a sanguine picture of bank financials. Far from being saddled with weakened financials after two waves of Covid, banks have expanded their aggregate profits by 31 per cent in the first half of FY22 helped by higher spreads and treasury gains. This, combined with active fund-raising, helped them to shore up their capital adequacy to 16.6 per cent, far above the regulatory minimum of 9 per cent. Banks are not only sitting pretty now on ample capital cushion but their NPAs are also moderating. It is not surprising then that RBI’s usual stress tests for macro risks such as slowing GDP, worsening inflation, and current account balance, suggested that banks today face limited vulnerability and would not be left with double-digit NPAs or poor capital buffers should such risks crop up. While this is good news for the government, which need not find funds for recapitalisation, the challenge now is to induce banks to step up industrial lending, which holds the key to capex revival and sustained economic growth.

On this score, some of the datasets presented by the FSR make for worrying reading. For one, much of banks’ incremental lending is now flowing to individuals seeking personal loans rather than businesses seeking commercial credit. In FY21, retail loans accounted for as much 64 per cent of all incremental bank credit, while industrial credit shrank by 22 per cent. Trade and agriculture managed a 21 per cent share each, but personal loans displacing all forms of business loans doesn’t appear a healthy trend. Two, even within commercial credit, lending appears to favour PSUs (12.4 per cent growth) while private sector borrowers (5.8 per cent contraction), particularly lower rated ones, seem to be getting the short shrift. Three, disbursements to MSMEs, which had received a boost from the Centre’s ECLG scheme seem to be flagging again, with credit growth at just 1.9 per cent in the September 2021 quarter.

While credit flowing to individuals instead of industry may hold out hope for a consumption-driven revival, it is not without its trouble spots. The FSR uses CIBIL TransUnion data to show that the proportion of sub-prime borrowers in consumer loans has edged up from 27.2 per cent in September 2020 to 29.9 per cent in September 2021. Retail loan delinquencies, while not at alarming levels yet, are rising with PSU banks (5.03 per cent), NBFCs (3.77 per cent) and fintech players (4.56 per cent) reporting stress by September. Both lenders and policymakers may need to exercise vigilance on this build-up of stress in retail loans, so that there is no repeat of the earlier experience with industrial loans. The report notes that in emerging market economies, NPAs typically peak 6-8 quarters after a severe recession, so it may be early days to call a victory on the strength of Indian banks.

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