Has The Government Push Prompted PSU Banks To Lend More?

With the economy slowing, the government pushed lenders, particularly public sector banks, into lending more to support the economy. Nearly Rs 70,000 crore in additional capital was provided, loan melas were organised and the Reserve Bank of India was nudged into easing restrictions placed on certain weak lenders.

Have all of these measures led to increased lending by India’s government-owned banks? Yes, suggests the aggregate lending data. A granular look at the numbers, however, shows a different picture.

For the October-December 2019 quarter, the outstanding advances of 14 public sector banks, which have reported earnings so far, rose 7 percent year-on-year to Rs 55.2 lakh crore. That 7 percent growth is broadly in line with the pace at which overall banking system credit is growing.

Growth in advances for these 14 banks has also rebounded from 5.7 percent year-on-year in the second to 7 percent in the third quarter, data compiled by BloombergQuint showed.

A break-up of the data presents a different picture.

From the 14 banks included in the study, only five reported credit growth at levels close to or above the pace at which banking system credit is growing.

The highest growth was reported by Oriental Bank of Commerce. The lender grew its outstanding advances by 11 percent after it exited the RBI’s prompt corrective action framework in February 2019. Indian Bank, which is among the healthiest of public sector lenders, reported the second-highest credit growth at 8.9 percent. State Bank of India, United Bank of India and Syndicate Bank reported growth of just under 7 percent.

For the rest of the public sector lenders, growth in advances has remained sub-par, the third-quarter earnings data showed.

The worst performers among this set were Indian Overseas Bank, Central Bank of India and Punjab National Bank. Each of these banks saw a decline in outstanding advances during the quarter.

Lower Working Capital Off-Take Adds To Pressure

What is still holding back public sector banks from pushing more credit into the economy? Bankers suggest that a mix of factors is keeping loan growth weak.

India’s largest lender SBI pointed to the continued sluggishness in corporate lending. While demand for long-term investment credit has been missing for sometime now, working capital requirements have also come down due to the slowdown in the economy. A fall in interest rates in the bond markets have also led to some working capital demand being diverted away from banks.

SBI has seen its large and mid-corporate borrowers not utilise the full working capital limits available to them in the current macroeconomic environment, Arijit Basu, managing director of the bank, told reporters on the sidelines of the bank’s earnings press conference.

The SBI management also pointed a finger at the RBI’s large exposure framework, which has come in the way of the bank expanding its corporate loan portfolio. The bank continues to review loan proposals where it has headroom to grow, the management said.

These pulls and pressures means that SBI’s corporate loan book fell 0.48 percent year-on-year to Rs 7.71 lakh crore as on Dec. 31.

For Bank of Baroda, too, the pressure on loan growth came from a year-on-year decline in corporate credit, even as the retail, SME and agriculture segments showed growth.

Punjab National Bank, which saw a contraction in loan growth, also blamed lower off-take of sanctioned limits. “Unfortunately, in the December quarter, there was non-availment of sanctioned credit limits by some of the borrowers,” Rajesh Kumar Yaduvanshi, executive director at the lender, told BloombergQuint. He added that the bank has also been selective in the corporates that it is willing to lend to. The bank has also seen slower growth is its SME book. “In the coming quarters such as the March quarter, we would expect to see about 4 percent credit growth,” Yaduvanshi said.

For Union Bank of India, loan growth rose to an eight-quarter high but remained below the system-level credit growth. Rajkiran Rai G, chief executive officer at Union Bank of India, told BloombergQuint said the bank has pushed corporate credit to complement steady growth in the retail loan portfolio. He added that the lender will be able to push up credit growth to near 9 percent in the quarters ahead.

Syndicate Bank, which reported credit growth of just under 7 percent, blamed the continued low capacity utilisation across industry. Bankers are willing to lend but capacity utilisation remains low and new capacities are not being planned, said Mrutyunjay Mahapatra, chief executive officer of Syndicate Bank. This continues to hamper credit growth particularly in the manufacturing sector, Mahapatra told BloombergQuint.

Stuck In A Vicious Cycle

Analysts said banks are stuck in a vicious cycle.

“This is a period of deleveraging for a lot of companies, while banks are also seeing large write offs from their balancesheet. The combined effect is that despite good retail disbursements, the overall credit growth is not keeping pace. We expect this condition to continue till September 2020,” said Asutosh Mishra, head of research at Ashika Stock Broking.

According to Dhananjay Sinha, head of strategy research and chief economist at IDFC Securities, economic growth was weak through 2019, impacting loan growth. Moreover, the funds infused by the government has more or less gone towards shoring up of regulatory capital, rather than giving the lenders the growth capital they need, he said.

Going ahead though, measures by the RBI to push lending to retail housing, auto and MSME borrowers will result in improved growth for the entire system, Sinha said.

On Feb. 6, the RBI announced a set of measures aimed at pushing up credit growth. The central bank announced long-term repo operations, which will provide long-term liquidity to banks at the benchmark policy rate. That, together with relief on cash reserve ratio requirements, could help push up credit growth, the analysts expect.