The Night Is Not Yet Over...
...but the role of banks being the sole lenders in town is in its sunset days
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In what way was fiscal 2017 different from the preceding one for banks? The response hinges on whom you seek out. Voices from the top draw of banks will say that despite demonetisation and the state of our credit markets, banks held the flight path in their businesses; made strides in digital banking and payments. In banks lower down the league — be it state-run or otherwise — it will be one big wail about dud-loans, the lack of capital with the usual homilies thrown in about how the tide will rise sometime down the line to lift all boats. What you can’t get away from is at the systemic level, we were very much in the same place — this is not to say the Insolvency and Bankruptcy Code (IBC 2016) or the crack of the whip by Mint Road to clean up banks were of little importance; just that many seasons will pass before these pay off at the ground level.
At Ground Zero…
The consolidated balance sheets of banks continued to shrink; it had begun from the end of calendar year 2014. The Reserve Bank of India’s (RBI) report ‘Trend and Progress of Banking in India (2016-17)’ points out, it fell to 7.2 per cent at end-March 2017, down from 7.7 per cent. Blame it on the decline in asset quality and a sharp rise for its provisioning.
The gross non-performing assets (NPAs) ratio (systemic) rose to 9.3 per cent (7.5 per cent); net NPAs to 5.3 per cent (4.4 per cent). For state-run banks, the same stood at 11.7 per cent (9.3 per cent) and 6.9 per cent (5.7 per cent). So, is it any wonder that as a group, their credit growth rate fell to a negative 1.2 per cent thereabouts (2.10 per cent and 7.40 per cent in the run-up fiscals). Why single out this lot of banks? Well, it’s what they can or can’t do that matter in an inherently bank-loan fuelled economy; they account for nearly 70 per cent of the credit share (of outstanding credit). That’s why you saw bank credit growth collapse to a six-decade low!
We also saw the first signs of what is in store on the disintermediation front. The role of banks being the sole lenders in town is in its sunset days. In fiscal 2017, banks’ share in credit-lines extended fell to 34.9 per cent as non-banks made up for the rest; it had been split evenly in the preceding fiscal — basically, the gap opened by dwindling bank credit is being filled by its substitutes. And within non-banks, private placements of corporate bonds and commercial papers (CPs) made up for nearly 21 per cent of the funds guzzled by firms. The recourse to this window — in the main by larger and the better rated among them — was driven by a sharp dip in yields on corporate paper; the 175 basis points slash in key rates by Mint Road being fully passed on during the monetary policy’s accommodative phase from the dawn of 2015. While recourse to non-bank sources of capital is desirable, what you saw, of late, may just be transient; we will flesh this aspect later.
The aforementioned trend was accentuated by a surfeit of liquidity post-demonetisation (due to a surge in deposits) and the enhanced flow of household savings into mutual funds, insurance firms and pension funds stoked their appetite for bonds. All of this resulted in a slump in the systemic outstanding credit-deposit (CD) ratio — defined as the percentage of loans given out of every Rs 100 in deposits — to 73 per cent at end-March 2017 (78.2 per cent); at the incremental level, CD ratios were in negative territory — another first.
If you were to look at the income statements, total income went up a tad in fiscal 2017 driven by non-interest income; it was on expected lines as interest income growth was the casualty of poor credit growth and a surge in NPAs. On the expenditure side, interest outgo also was negligible as low-cost current and savings accounts soared due to demonetisation and the slower pace of transmission of policy rate cuts to lending rates vis-à-vis deposit rates. (As mentioned earlier, this was diametrically opposite to what was seen in the bond markets; Read: bank credit substitutes). You also saw a slower pace of rise in net interest income, which led to a marginal decline in banks’ net interest margin (NIM). This even after banks tweaked their spreads after the marginal cost of funds-based lending rate (MCLR) since April 2016 to preserve their NIMs.
The Plot Going Ahead
Credit offtake will see an uptick down the line and many may be inclined to link it to the green shoots of an incipient recovery. But technical reasons will also be at play here.
Both poor credit offtake and asset quality had led to higher investments in government securities (G-Secs) from banks for the better part of the last 15 months. If there is indeed to be a recovery, the bonanza the better-rated firms availed of by hooking into the bank-credit substitutes will vaporise and it will be back to equilibrium position — traditional bank loans. Then, you have oil prices, which can spoil the fun. All of this can only mean interest rates will stay firm going ahead. Ironically, it may well be Mint Road’s exposure norms to India Inc., which will come to its aid. That is because fresh recapitalisation doesn’t mean state-run banks can dance around these norms; much of the funds infused may even go towards provisioning for all you know. It may well mean that only better rated and those firms that are not constrained by banks’ exposure norms get to party — in a benign interest rate scenario or otherwise. In turn, this will mean that banks will have to go down the food chain and manage risks well. Even as they fend of disruptors like fintechs, small finance, and payment banks.