Today’s loans, Tomorrow’s NPAs

NPA

The central focus of the government now is to trigger lending into the system, through banks and NBFCs and the FM has been directing banks to lend copiously.

The receding consumer demand, continues to slow down the Indian economy, with a little revival insight. The government has been desperate to revive the stalled demand, by putting money in the pockets of households and corporates too, hoping that it will encourage them to spend and invest. A series of initiatives have been triggered to pump cash into the system, of which the loans melas thrust on reluctant bankers by the government, is the latest move. The money sought to be infused into the economy so far, hoping that it will circulate and move into the larger economy in order to arrest the slowdown include tax rate cuts of Rs.1.45 lac crores, releasing GST refunds of Rs.20000 crores to MSMEs, urging large corporates to repay MSME dues of Rs.40000 crores, paying outstanding vendor dues of Rs.25000 crores by the government, opening a credit window of Rs.100000 crores to fund/bailout NBFCs, setting aside Rs.30000 crores for housing finance companies to fund the affordable housing segment, front-loading Rs.50000 crores by way of bank recapitalisation and encouraging spending by PSUs in a big way. That aggregates to pumping in almost Rs.500000 crores into the country, expecting that it will recharge a moribund economy, by funding investment, production and consumption.

The central focus of the government now is to trigger lending into the system, through banks and NBFCs and the FM has been directing banks to lend copiously. The target is to fund corporates, hoping that they will scale up operations, which will create new jobs too. While speaking to a group of editors in Mumbai recently, the FM said that the government’s immediate priority is to infuse liquidity into the system, with the hope that the money given moves into the real economy. She reiterated that her current focus is that money reaches the hands of people. She also said that banks have enough funds to lend and that there is no shortage of funds.

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The fact is that banks are loaded with funds. Fresh deposits received are far in excess of the fresh loans given, during the past six months and the growth in bank credit has slowed to a mere 8.74%, as against 12.38% in the same period last year. Disbursals in the first half of the current FY have fallen by half, and commercial credit growth for the SME sector fell from 6.2% to 2.9% making SME credit the most severely impacted during this period. The steep decline in lending by NBFCs also added to this sharp slowdown in lending. The reality is that with NPAs having risen by Rs.31600 cr. between July 2018 to June 2019, there has been a deterioration in asset quality and risk-averse banks are not willing to lend. Banks have deposited Rs. 2 lakh crores with the RBI in the past six months, preferring the safety of capital, rather than pursue risky returns. An economist from the SBI says that there is heightened risk aversion in banks and with credit downgrades being much more than upgrades, a CIBIL-SIDBI MSME report says that there has been a marked slowdown in credit to the MSME sector. Moreover, if banks are reluctant lenders, on one hand, good borrowers are reluctant to borrow on the other, unwilling to take more debt in an uncertain economy.

Amidst this slowdown in the economy and bank credit lending, the FM has been aggressively ordering banks to copiously lend in loans melas. She has also directed banks to get five additional borrowers for each existing borrower they have. She triumphantly announced that the first phase of the loan melas held in 200 districts between October 1-9, has been a great success, with Rs.82000 crores disbursed by way of fresh loans. She said that the government directed loans are reaching out to all sectors to ensure that consumption is not hit because of liquidity crunch.

Much as the FM maybe elated by the loans melas success, we are not. There is already huge stress in the MSME sector bank loans, which the government has hidden by directing banks not to recognise NPAs in the sector until March 2020. And now to that very stressed sector loans are being given generously, at a time when banks have been reluctant lenders in these loans melas. To us, these loans of today are NPAs of tomorrow and if the UPA created a legacy of NPAs, so will the NDA.


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