Bank Lending Down by Half in 2016-2017


On April 6, 2017, the Reserve Bank of India(RBI) published the latest Monetary Policy Report. Buried on page 40 of the report is a very interesting data point which rather surprisingly hasn’t been splashed on the front pages of the pink papers as yet.

In 2016-2017, Indian banks gave out total non-food credit worth Rs 3,65,500 crore. Banks give working-capital loans to the Food Corporation of India(FCI) to carry out its procurement actions. FCI primarily buys rice and wheat directly from Indian farmers using the loans it takes from banks. When these loans are subtracted from overall loans given out by banks, we arrive at non-food credit.

In 2015-2016, the total non-food credit of banks had amounted to Rs 7,02,400 crore. What this means that non-food credit came crashing down by close to 48 per cent during the course of 2016-2017, the last financial year. To put it simply, this basically means that in 2016-2017, banks lent around half of what they had lent out in 2015-2016.

The important question is why has this happened? A major reason for this is that the total outstanding loans to industry has actually shrunk in 2016-2017(between April 2016 and February 2017, which is the latest data available) by Rs 60,064 crore. This basically means that Indian banks on the whole, did not give a single new rupee to industry as a loan during the course of 2016-2017.

And the reason for that is very straightforward. Over the years many corporates have defaulted on the loans they had taken on from banks, in particular public sector banks. And this explains why banks are not in the mood to lend to corporates anymore. As they say, one bitten twice shy.

In fact, as on December 31, 2016, the gross non-performing assets or bad loans of public sector banks had stood at Rs 6,46,199 crore, having jumped by 137 per cent over a period of two years. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. The bad loans of private banks as on December 31, 2016, stood at Rs 86,124 crore.

A major chunk of these defaults has come from corporates. As of March 31, 2016, the total corporate bad loans of public sector banks had stood at Rs 3,36,124 crore or 11.95 per cent of the total loans given out to corporates. It formed a little more than 62 per cent of the total bad loans. This is the latest number I could find in this context. There is enough anecdotal evidence to suggest that the situation has worsened since then.

Given this, as I said earlier, banks are not in the mood to lend to corporates. Hence, their overall lending for 2016-2017 has shrunk by half in comparison to 2015-2016.

The interesting thing is that while Indian banks may not be lending as much, the other sources of funding haven’t really dried up. Private placements of debt jumped up majorly in 2016-2017 in comparison to 2015-2016 and so did issuance of commercial paper by non-financial entities. Over and above this, the foreign direct investment into the country continued to remain strong. During 2016-2017, FDI worth Rs 2,53,500 crore came into the country. This was more or less similar to the amount that came in 2015-2016.

In total, the flow of financial resources to the commercial sector stood at Rs 1,262,000 crore, the RBI estimate suggests. This is around 12.1 per cent lower than the last year. Hence, the overall availability of money has shrunk but the situation is not as bad as bank lending data makes it out to be.

Basically, while banks may not want to lend to corporates, there are other sources of funding that do remain strong. Having said that, a fall of more than 12 per cent in total flow of financial resources to the commercial sector, is not a good sign on the economic front. This can only be corrected only after banks come back into the mood to lend to corporates. And that will only happen when banks get into a position where they are able to recover back from corporates a significant chunk of their bad loans. As of now no such signs are visible.


The column originally appeared in the Daily News and Analysis on April 25, 2017

Are banks are putting lipstick on a pig to make it look like a princess?

lipstick-pig-illustrationVivek Kaul 
Borrowing money to run or expand a business is standard operating procedure. The only thing is that the money that has been borrowed needs to be repaid. But sometimes the business does not make enough to repay the borrowed money or debt as it is referred to as.
And some other times, the business does not make enough money even to repay the interest on the debt, that it has taken on. Indian businesses are going through that phase right now. A significant number of them are not making enough money to even repay the interest on the debt that they taken on.
In a report dated November 19, 2013, Ashish Gupta, Prashant Kumar and Kush Shah of Credit Suisse make this point. As they write “
Of our sample of listed companies(around 3,700 listed companies), the share of loans with corporates having interest coverage (IC1) <1 went up to 34% (versus 31% in 1Q14). Of these, 80% (78% in 1Q) of loans were with companies which had IC<1 for at least four quarters in the past two years and 26% of them have not covered interest in eight consecutive quarters.”
Now what does this mean in simple English? Around 34% of the listed companies that Credit Suisse follows have an interest coverage ratio of less than one. Interest coverage ratio is essentially the earnings before interest and taxes of a company divided by its interest expense. If the interest coverage ratio is less than one what it means is that the company is not making enough money to pay the interest on its outstanding debt.
Hence, more than one third of the listed companies in the Credit Suisse sample are not making enough money to pay the interest on their debt. Of this lot nearly 80% have had an interest coverage ratio of less than one in at least four quarters in the past two years. And 26% have not made enough money to cover their interest for eight consecutive quarters.
The only conclusion that one can draw from this is that India Inc is sitting on a debt time bomb. “Large corporates continue to be under significant stress as out of the top-50 companies by debt with interest coverage<1 in the second quarter, 23 companies haven’t covered interest in seven or more quarters in past two years and 38 companies were loss making at a profit after tax level,” write the analysts.
A lot of this borrowing was carried out during the easy money years of 2003-2008, when banks were falling over one another to lend money. But now the chickens are coming home to roost. When corporates do not have enough money to repay the interest on their outstanding debt, banks can’t be in the best of shape.
The non performing assets of banks have been on their way up. As economist Madan Sabnavis
wrote in a recent column in The Financial ExpressEver since the economy started slipping, companies have found it difficult to service their loans leading to NPAs’ volume increasing from 2.4% in FY11 to 3.0% in FY12 and around 3.6% in FY13. In absolute numbers, they stood at around Rs 1.9 lakh crore in March 2013.”
But what is even more worrying is the rate at which the total amount of restructured loans have been growing. Under restructuring, companies are allowed a certain moratorium on repayment of the outstanding debt. The interest rates to be paid on the outstanding debt are eased at the same time.
In a note dated November 7, 2013, Gupta and Kumar of Credit Suisse had pointed out that “Indian Bank restructured loans were at Rs3.3 trillion (Rs 3,30,000 crore) of which 55% has come through the corporate debt restructuring route.” The total amount of restructured loans are now at 6% of the total loans that banks have given(around 47% of networth of the banks).
And this continues to grow at a huge speed. In October 2013, the corporate debt restructuring cell received new references of Rs 170 billion (Rs 17,000 crore).
Economist Madan Sabnavis throws some more numbers. “
The CDR website shows that the volume of restructured debt has increased continuously, touching Rs 2.72 lakh crore as of September 2013 from Rs 0.9 lakh crore in FY09, and was at Rs 2.29 lakh crore by March 2013. In terms of a ratio as a percentage of total advances, CDR was higher at 4.4%, and even traditionally this ratio has been higher than the declared gross NPA ratio...Adding the NPAs to CDRs, the total would stand at 8% for FY13, which is quite scary,” he wrote in The Financial Express.
The reasoning given for corporate debt restructuring is that often a project that the business has borrowed for, does not take off due to external circumstances. This can vary from the environmental clearance not coming in to the land required for the project not being acquired in time.
But with the amount of loans being restructured rising at such a rapid rate leads one to wonder whether the banks genuinely feel that these loans will be repaid or as they just postponing the problem? Take the case of October 2013. New references of Rs 17,000 crore were made to the CDR cell. In comparison for the period of July 1 to September 30, 2013, references to the CDR cell had stood at Rs 24,900 crore.
The Reserve Bank of India(RBI) is clearly worried about this. “You can put lipstick on a pig but it doesn’t become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue. Anything which postpones a problem than recognising it is to be avoided,”
Raghuram Rajan, the RBI governor said a few days back.
But just being worried will not help.
The article originally appeared on on November 22, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)