Banks should start lending to large industries :RBI

There has been a shift of focus toward retail loans, says RBI

MUMBAI: The Reserve Bank of India (RBI) wants banks to resume lending to large industries instead of restricting themselves to the low-risk retail sector.

In its Report on Trend and Progress of Banking in India 2018-19, released on Tuesday, the central bank said banks need to restart lending to industries in order to stimulate the capex and investment cycle. According to RBI, there has been a shift of focus toward retail loans due to subdued profitability of corporates, low interest coverage ratio, and deleveraging by corporates along with risk aversion of banks.

Having burnt their fingers in large corporate loan defaults, most lenders have shifted their portfolio mix in favour of smaller retail loans. Outstanding bank loans to industries increased 5.6% year-on-year (y-o-y) to ₹33.04 lakh crore in FY19, but declined 3.95% between March and September 2019. At the end of September, it stood at ₹31.74 lakh crore. Retail loans, on the other hand, grew 18.5% y-o-y to ₹23.02 lakh crore in FY19 and 18.1% between March and September 2019 to ₹24.64 lakh crore, albeit on a smaller base. “The need of the hour is to kick-start industrial credit and use the impetus therefrom to regenerate a virtuous cycle of capex, investment and growth,” said RBI.

The latest in a series of bad news came earlier last month as India’s economic growth fell to 4.5% in the September quarter. Moreover, the core sector, comprising eight infrastructure industries, contracted 5.8% in October, the second consecutive

month of contraction.

The central bank’s report said while diversifying from industrial loans to retail acts as a risk mitigation tool, it has its own limitations. For instance, the slowdown in consumption and overall economic growth, RBI said, may affect the demand for and the quality of retail loans.

“Moreover, household leverage and indebtedness need to be kept in focus in the context of overall financial stability,” it said.

The regulator also cautioned that banks must follow proper risk pricing so that the health of the banking sector is not compromised, while ensuring adequate credit to these sectors.

On capital raising, RBI said in the coming years the financial health of public sector banks (PSBS) should increasingly be assessed by their ability to access capital markets instead of the tendency to depend excessively on the government.

“Going forward, the financial health of PSBS should increasingly be assessed by their ability to access capital markets rather than looking at the government as a recapitaliser of the first and last resort,” the central bank said.

RBI said PSBS led the recovery in capital ratios for the banking sector in FY19. They were recapitalised with ₹90,000 crore in FY18 and another ₹1.06 lakh crore in FY19. This bolstered their capital position, even as they battled with the overhang of impaired assets. Private banks and foreign banks remained well-capitalized and above the regulatory minimum of 10.875% of risk-weighted assets in March 2019. However, private banks experienced a marginal decline in capital adequacy ratio in FY19 after the reclassification of IDBI Bank as a private bank.