Loan mela mindset
Union Finance Minister Nirmala Sitharaman on Wednesday asked public sector banks (PSBS) to “go out and give credit” through outreach programmes in every district of the county and referred to the 2019 “loan melas” undertaken by banks across 400 districts. She also asked PSBS to reach out to different sectors to address their needs. The idea clearly is to keep the economic recovery going. Although economic activity has recovered with a decline in Covid-19 cases, the overall demand condition in the economy is weak. A higher flow of credit to various segments of the economy, it is hoped, will help push consumption and investment. Growth in bank credit is fairly subdued at about 6 per cent. While the intention behind such an outreach programme is understandable, the outcome, as always, would be unpleasant. It is critical for the government to understand why the credit offtake is weak.
Industry has been in the process of deleveraging over the last few years. Since the overall demand is weak and there is spare capacity in the system, companies are unwilling to invest significantly at this stage. Further, lower overall demand and capacity utilisation mean that the demand for working capital is also low. Besides, firms that have capital needs are raising funds from the market — both debt and equity. Lower interest rates and significantly higher liquidity in the financial system have made it easier for firms to raise money from the debt market. Corporate bond issuance in 2020-21, for instance, increased by over 13 per cent to ~7.8 trillion. Fund mobilisation through the equity market, meanwhile, went up by about 43 per cent in the last fiscal year. The trend so far suggests that the current fiscal year will see a record issuance in the equity market. Besides, with higher profits and improved balance sheets, the corporate sector is expected to be able to meet investment needs through internal accruals to some extent. Thus, the need for bank borrowing in the corporate sector seems to have ebbed for now.
Consumers are also not keen to borrow heavily at the moment. Economic growth in the years preceding the pandemic was driven significantly by private consumption, which was partly financed by debt. The decline in income because of Covid-related disruption and the given medium-term economic uncertainty are unlikely to encourage households to accumulate more debt. In the given circumstance, the idea of pushing credit is unlikely to work. In fact, in principle, the idea to push PSBS to lend is inappropriate.
PSBS are anyway not known for following very high lending standards. They get further compromised when banks are directed to lend by the government. The objective of managers in PSBS shifts from quality to meeting lending targets. This affects the overall asset quality and lending capacity of PSBS. A higher level of non-performing assets then requires capital infusion from the government. PSBS have written off about ~8 trillion worth of loans over the last seven years, which is more than twice the amount of capital infused by the government during the same period. This is clearly an unsustainable position. One of the big promises of the Narendra Modi government was not to interfere in the working of PSBS and to stop the practice of “phone banking”. The government must stop treating PSBS as an extension of the finance ministry. The policy priority, for now, should be to start the bank privatisation process.