Loan melas may trigger fresh NPA crisis

“They had learned nothing and forgotten nothing”. This oft-repeated quote is what comes to mind with the Centre’s latest ‘loan mela ’ drive. The proposed loan camps alongside dispensation for stressed MSMEs is a throwback of sorts to the genesis of the ongoing bad loan mess. After all, much of our NPA problems and India Inc’s indebtedness stems from shoddy decisions and indiscriminate lending in the mid-2000s, triggered by political interventions and crony capitalism.

In a desperate attempt to revive the stuttering economy, Finance Minister Nirmala Sitharaman announced that all banks are to hold large gatherings in 400 districts, where customers can come and take any type of loan from banks and the NBFCs partnering with them. It has been said that the last time such loan melas took place was in the early 1980s. But under the BJP-led government, such a massive-scale initiative reminds you of the Jan Dhan drive in which eight crore accounts were opened in just 100 days.

But then, lending and opening of accounts are two vastly different things, are they not? This is a question that the government, hell-bent on jump-starting the credit engine in the economy, needs to ask itself before embarking on such a massive-scale loan campaign.

Lending involves assessment of the creditworthiness of a borrower, careful due diligence of the purpose for which the loan is being disbursed and continuous follow-up. Side-stepping any of the credit appraisal processes to meet the FM’s “five new customers for every one existing customer’’ diktat can only spell trouble for the banking sector, which is still reeling under the after-effects of indiscriminate corporate lending.

The FM’s proposed move attempts to dispel the notion that banks are still reluctant to lend to cash-strapped NBFCs (hence the insistence that banks partner with NBFCs). The idea is also to ensure maximum credit disbursal during the festive season. Banks extending credit in full throttle across villages and districts is expected to kick off consumption and fuel economic growth.

The question is whether such short-term, consumption-led doses can lead to a sustainable growth in the economy? Remember, during the 2008 global financial crisis, it was a similar consumption-driven stimulus that boosted our economy. A decade later, the profligacy has ended up costing banks dearly.

If banks are not prudent and guarded this time around, then the loan jamboree could well set off the next NPA crisis.

NPAs on the rise

Interestingly, the FM’s attempt to boost credit growth in the so-called ‘RAM’ category — retail, agriculture and MSMEs — through the loan camps are the very segments that banks have been focussing on, over the past two years. After the massive clean-up of balance sheets and huge NPA provisioning for corporate loans, PSU banks have been chasing less risky loans (perceptibly at least). The credit growth in the RAM category has been 12-14 per cent over the past 3-4 years.

But underlying risks in these segments have started to come to light, evident in the sharp rise in bad loans over the past two years.

While a chunk of the NPAs in the system still pertains to the corporate sector, there has been a sharp rise in MSME and agri NPAs in the past two years. For instance, NPAs in the agriculture loans have shot up from 4-odd per cent in FY16 to more than 8 per cent in FY19. Individual PSU bank figures are more disturbing. In some banks, NPAs in the agri and MSME sector are at a high 15-16 per cent. If banks embark on reckless lending to these segments, NPAs can balloon over the next 1-2 years.

What is particularly worrying is the fact that weak economic growth adversely impacting personal incomes (rural incomes have seen a sharper fall), can nudge people and businesses to borrow more to keep up with their spending activity, no matter what their credit absorption capacity may be.

Few bankers have indicated that loans offered through these camps would be special festive offers, that include attractive interest rates and waiver of processing fee etc, which may lead farmers and small businesses to lap up loans with great zeal.

Pushing credit at such a massive scale to borrowers with little understanding of the perils of over-leveraging, can only spell doom.

According to the report of the RBI’s Internal Working Group on agriculture credit, in some States, agri credit is higher than their agri GDP, indicating the possibility of diversion of credit for non-agricultural purposes.

This only accentuates the problem of debt overhang, given that there is a high risk of indebtedness in some of the States. Bankers say that most of the farmers have become overleveraged over a period of time, due to restructuring and additional funding.

One needs to remember that borrowers in the agri or MSME segments are also less resilient, have very little fallback and would take a long time to recover from a stress situation.

While ticket size of these loans is far lower than under corporate loans, a singular event in a particular State or segment can have a cascading effect. Demonetisation, dealing a sharp blow to MFIs and small finance banks, is a case in point.

What began as a cash-crunch problem ended up distorting group repayment behaviour, thanks to all sorts of political interventions and games.

MSME restructuring

The bigger worry is the FM’s suggestion that no MSME stressed loan be classified as an NPA until March 31, 2020. In January, the RBI had allowed a one-time restructuring of existing loans to MSMEs (exposure not exceeding ₹25 crore). The FM’s statement would imply that banks should follow the RBI’s circular to ensure that MSME accounts are restructured and not declared an NPA. But there are already concerns being raised over the lack of proper due diligence and prudent restructuring under this forbearance. Also, such adhoc regulatory dispensation can destroy credit culture, as in the case of agriculture loans following the large scale loan waivers by various State governments.

Above all, the government should not forget that it was the earlier regulatory forbearance in 2008-09 in the form of restructured loans that had cost banks heavily. While the RBI closed the restructuring window by fiscal 2015, the RBI’s asset quality review in December 2015 brought to light the blatant attempt by banks to sweep the mess under the carpet in the guise of restructured loans. The RBI had again sought to flush out the rot in banks’ books, by withdrawing various restructuring schemes — CDR, SDR, S4A or 5/25. Over the past three years, the swachh bank mission has led to nearly ₹2.5 lakh crore of bad loans being added by just PSU Banks — that have reported two consecutive years of huge losses.

It has been disturbing enough that banks have had to carry their legacy corporate bad loans this far. Another leg of NPA crisis led by retail, MSME and agriculture loans can be disastrous. It is time the government — the eternal benefactor of capital-starved PSU banks — learnt from past lessons.

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