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Banks strong, but carry economy’s strains

india Updated: Feb 16, 2009 23:06 IST
Rajendra Palande
Rajendra Palande
Hindustan Times
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After what seemed like years of easy credit both individuals and companies found it hard to get loans in the second half of last year, as banks turned increasingly risk aversive. A global economic crisis led to foreign institutional investors pulling their money out of India, accentuating a local liquidity shortage.

Banks are now tougher with loan applications after four years of growth driven by home and car purchases.

For the first time in more than a decade, the total outstanding credit has actually shrunk during a few fortnights . In the fortnight ended January 30, 2009, credit outstanding contracted by Rs 8,822 crore to Rs 26,36,338 crore.

Risk aversion is pulling down credit growth, which has fallen to 19.3 per cent against 22.9 per cent a year ago.

The credit growth now is the slowest in more than five years. To provide a boost to the slowing economy which is expected to slow to 7.1 per cent in 2008-09 from around 9 per cent in the previous three years, there is greater focus on giving a boost to lending by banks.

The RBI expects credit growth in 2008-09 to be around 24 per cent, but it would take a huge amount of effort if expansion in loans outstanding has to be anywhere close to the target.

Credit growth had moved above 25 per cent in November 2008 as bleeding oil companies were borrowing heavily and because of huge demand for short-term credit from importers, as overseas supplier’s credit had dried up.

Banks are the only source of funding available for companies with overseas borrowings being non-existent and domestic equity markets remaining frozen, as fallout of the global credit squeeze.

Increase in bank credit in the current financial year so far (April1, 2008 to January 30, 2009) at Rs 2,74,424 crore was a little lower than Rs 2,79,127 crore in the same period a year earlier.

Accretion to deposits of banks was similarly slower than a year earlier. The increase in deposits in the current financial year up to January 10, 2009 was Rs 4,71,862 crore, a little less than Rs 4,79,777 crore a year earlier.

Banks are also grappling with a substantial increase in non-performing assets (NPAs)—loans that stop yielding interest, as companies and individuals are affected by the economic downturn in India as a result of the recession in the developed countries.

Banks in India are, however, much better off with stronger balance sheets and comfortable risk-weighted asset ratios.

RBI has already helped banks tackle the threat of rising NPAs. The central bank has allowed banks to treat loans that are being serviced regularly as good ones even if they are restructured to allow borrowers pay lower equated monthly installments over a longer period. The RBI has also extended the facility of corporate debt restructuring for bad loans in the services sector.

This facility would come in handy as some retail chains like the neighbourhood retailer Subhiksha and transport fleet operators face a fall in revenues and profit as the economy slows further.

The new government after the general elections in April-May 2009 is expected to accelerate reforms in the financial sector, particularly the banking sector, which would need a lot of capital to meet loan demand. Banks would be the main source of funding for companies as raising money overseas or from the capital market would continue to be difficult.