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Bad loan mess adversely affects public sector banks

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Bad loan mess adversely affects public sector banks

In two decades, Public sector banks (PSBs) saw their loan book shrink for the first time as advances falling by Rs 1.35 lakh crore in FY17. In comparison, PSBs had made new loans (on a net basis) of Rs 1.34 lakh crore in Financial Year 2016.

The average capital adequacy of PSBs is 40 per cent lesser than that of private sector banks and half of listed retail non-banking finance companies (NBFCs).

For each Rs 100 worth of advances by PSBs backed a sum of Rs 10.4 worth of core capital or net worth during the financial year 2017. The other rates for private sector banks and listed NBFCs were Rs 17 and Rs 21.4, respectively. Hence low capital adequacy restricted them to make fresh loans.

The PSBs could make fresh loans of over Rs 6 lakh crore during March 2014 fiscal year ending.

The decline in advances gained speed during the present fiscal year, in accordance with the RBI’s 2016-17 annual report. Fresh non-food credit by commercial banks, including both public and private banks, decreased by Rs 1.92 lakh crore during April-June 2017 period. On the other hand, non-food credit by banks had grown by Rs 26,300 crore in the first quarter of Financial Year 16.

The contraction was led by PSBs while the private sector banks and NBFCs continue to increase their loan books, taking full advantage of the opportunity to grow given way by the absence of PSBs in the market.

Experts say companies with good credit ratings are moving their debt from banks to bond market leading in repayments to banks. PSBs witnessed more repayment by the corporate and commercial borrowers than the new borrowings, leading to a decrease in the loan book. Not very surprisingly, the market analysts are not sure about the future prospects of PSBs.

After accounting for the heavy losses for bad loans, most of PSBs have been left with any capital to make fresh loans so larger loan to the corporate sector is out of question.

This has made the business move away from PSBs to private sector banks and retail NBFCs. This downfall in credit growth by PSBs has opened new growth avenues for private sector banks and NBFCs. It has been made convenient by an easy access to debt and equity capitals for the others say the experts.

The trend has only gained momentum in Financial Year 18. The total credit of housing finance companies was shot up to a sum Rs 22,500 crore in the first two months of the Financial Year 2018, from Rs 10,000 crore during April-June 2016, as per the Reserve Bank of India annual report. In the same period, net credit by large NBFCs took a leap eight times to Rs 28,500 crore, from Rs 3,500 crore during first quarter of Financial Year 2017. However data for private sector banks is unavailable.

All, 12 out of 21 PSBs reported negative credit growth in the Business Standard in the last fiscal year, against seven in Financial Year 2016; while two in Financial Year 2015 and zero in Financial Year 2014. The largest lender in India, State Bank of India also had to see a decline in its credit growth at the group level for first time in the last few years.

Advances were as low as 5.1 per cent on a yearly basis last fiscal year as many of its then present associates had shrunk their loan book.

Some of the major government aided banks that reported a decline in their loan book were Indian Overseas Bank, Allahabad Bank Dena Bank, IDBI Bank, Central Bank of India, Indian Bank etc.

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