The worst for India’s banking industry may be over. It is expected that banks have already disclosed all their restructured assets. Therefore all the NPAs have been revealed. New slippages, but nothing significant, may occur. But that always happens in businesses. There may be financial problems in the non-banking sector similar to what happened with IL&FS.
In the coming days, a section of banks will find restriction to extend loans as they are under the Prompt Corrective Action (PCA), imposed by the RBI. That is, they are to follow certain prudential norms for a certain period. But there are certain restrictions from the government on extending loans. For example, if banks are to give loans above Rs. 5 crore to an MSME unit, it has to be rated at least as investment grade or be BBB+ rated. Such sanctions do clip the wings of business activities. It will have a host of implications in the economy in the coming days. It is known that not many small business units or units of MSMEs are rated. They do not maintain that kind of discipline. A lot of business dealings are done in cash.
However, banks are stabilising. The government is providing capital to banks, mainly in the form of regulatory capital. We need capital for growth as well. Banks cannot use regulatory capital to disburse loans. If the government wants to increase loans to agriculture or MSMEs or retail and other important sectors in the interest of the economy, banks should be provided with more growth capital by the government.
One should bear in mind that we have our own areas of core competence. The UBI, IOB, Corporation Bank and some other banks have core competence in the MSME, retail, and agricultural sectors. But we really do not have it in sectors like power or other heavy industries where one has to offer very big loans. At present, we cannot adequately support the economy due to lack of adequate capital.
We are not hesitant to give loans to agriculture or MSMEs for fear of loan waivers or other uncertainties. We have to maintain our due diligence and proper risk analysis in serving loans. Uncertainty is an essential part of the business.
Regarding credit growth of the banking industry, RBI data show that it has been 15% but deposit growth in the industry is around 9%. So there is a gap between credit growth and deposit growth. As far as our bank is concerned, we have 17 to 18% growth in retail credit and 8-10% in MSMEs. Agriculture credit growth is more or less stagnant now. Actually MSME credit could have risen by 15%. But we are now more careful in this sector because the economy is not very conducive to disbursing loans. Demand for loan is there and RBI has lowered the SLR. So we can use more money for giving loans. At the same time, the demand for big projects is limited and we do not have large amounts of project loans in mind.