Risk mistrust, reluctance to lend: measures like the moratorium make banks suspicious of lending to high-risk sectors
The banking system has now been in surplus since June 2019, i.e. for two full years. During this period, banks lent little, placing the surplus in risk-free government bonds or in the RBI’s reverse repo window. The Financial Stability Report (FSR) draws attention to the fact that their investments in G-Secs are at their highest since March 2010. This makes them vulnerable to yield movements, especially if they have not. intention to hang on to bonds. until these ripen. But this kind of lazy bank seems to suit them, they are so reluctant to take risks. Nowhere is this more evident than in the wholesale industry – businesses and businesses – where credit growth in FY21 was a miserable 0.7%. Of the exposure to this segment, a good portion was made up of more secure public sector business loans. In addition, MSMEs were able to access funds, thanks to the government ECLGS. Banks have largely preferred to lend to individuals where growth was a respectable 11.3% In total, bank lending increased by 5.4% in FY21, the lowest of the last four years.
However, this does not appear to have affected their income; on the contrary, their performance in FY21 was the best in many years. The net interest income of a selected sample of 26 banks (public and private) jumped 22.4% in FY21, the largest increase in a decade. With access to cheap deposits, which left savers with a negative real interest rate, and yields barely trending down, banks were able to achieve nice spreads. Indeed, a year of pandemic saw their operating profits (pre-provisioning) soar by nearly 22%, again, the strongest growth in a decade. The intelligent increase in net income has, of course, been helped by the considerable drop in provisions.
Even in the current year, the FSR notes, the rise in corporate exposure (86% of loans to wholesale borrowers) has slowed down sequentially. The RBI believes that significantly lower rates on market instruments may have enabled private firms to reduce their exposure to the banking sector. If banks continue to remain as risk-averse as they are today and unwilling to lend to companies, other than high-rated ones, a whole segment of companies will be strapped for credit. Since the risk weights of certain loans to individuals, such as mortgage loans, are lower because they are better collateralised, the fall in the cost of capital of these exposures will encourage banks to lend more and more to individuals. They will avoid assets even with the slightest risk.
Policy changes – the six-month moratorium granted to borrowers last year – also make banks more wary of exposures to high-risk segments like MSMEs. Without ECGLS, this segment would not have been able to access bank loans last year. While the circumstances were undoubtedly extraordinary, the moratorium may not have been the best way to deal with borrower problems. Banks should have been given the flexibility to overhaul or restructure the debt on a case-by-case basis. If loan losses should now be lower than expected – FSR estimates a level below 10% by March 2022 – it is because the banks have stayed away from any risk. Unless bankers are shielded from investigative agencies and regulatory changes, they will continue to play it safe.