After note ban, banks flush with cash but

India Inc in no shape to borrow

“Demonetisation has made banks flush with funds, and they will lend it to productive

sectors.” — Power Minister Piyush Goyal, November 26, 2016.

It won’t be quite as easy as Goyal said.

Rising non-performing assets (NPAs) and sluggish economic growth sparked a 60% decline in

corporate borrowing over the last six years, according to an IndiaSpend analysis of Reserve

Bank of India (RBI) data, inhibiting the anticipated lending bonanza to companies from

banks after demonetisation.

Now, after the government scrapped 86% of India’s bank notes, by value, there are growing

indicators of a further slowing.

Automobile companies are witnessing the sharpest fall in deliveries to dealers in 16 years,

the Times of India reported, home sales have hit a six-year low, NDTV Profit reported, and

bank credit to infrastructure companies declined steadily over the first eight months of

2016-17 and contracted 6.7 per cent in November, the Indian Express reported, quoting RBI

data released on January 10, 2017.

So, the Rs 12.44 lakh crore that has now returned to the banking system may be difficult to

lend to the corporate sector.

“Deposits can be deployed only if interest rates are cut. Without reducing interest rates,

demand won’t rise,” said Nilanjan Ghosh, economist of the Observer Research Foundation,

a think tank. “The assumption is that demonetisation has led to higher deposits, resulting in

larger cash reserves, allowing banks to advance loans and earn interest. This, in turn, will

impact profits, strengthening the core capital of banks.”

“Demonetisation, apparently, has led to a swelling number of bank deposits, but even if

there is a significant thrust from the government, it may take banks between nine to 12

months to deploy such funds profitably,” said R Maheshwaran, a former general manager

with a public sector bank.

Merely reducing key rates won’t help, since banks will have to meet capital requirements

before they start lending, said Vipin Malik, former director, central board of the RBI.

“Increasing deposits may help in the long term, but the banks will breach the capital trigger

of March 2017 unless the government infuses capital,” said Malik. “The banks have

breached sectoral limit of lending in terms of capital adequacy.”

Stating that a lot of unaccounted money has been lodged in banks, finance minister Arun

Jaitley recently asserted that these deposits would increase the lending capacity of banks.

Why the decline in corporate loans

While the Centre banks on new deposits to revive lending, credit to the corporate sector

(manufacturing and services) declined 60%, from Rs 4.7 lakh crore ($71.5 billion) to Rs 1.9

lakh crore ($ 28.6 billion) over six years, according to RBI data.

Source: Reserve Bank of India

Of the two sectors, net loans to the manufacturing sector, which accounts for almost 65% of

loans to corporates, declined 77% from Rs 3.1 lakh crore ($47.19 billion) at the end of March

31, 2011, to only Rs 72,454 crore ($10.81 billion) at the end of March 31, 2016.

The worst hit were large-scale manufacturing units, which reported a drop of 69% in

borrowing over six years.

Loans to the services sector declined 46%, from Rs 1.62 lakh crore ($24.29 billion) on March

31, 2011, to Rs 87,689 crore ($13.08 billion) on March 31, 2015. However, credit given to

the sector increased marginally to Rs 1.1 lakh crore ($16.4 billion) in March 2016 compared

to the previous financial year.

Loans to the transport sector and non-banking financial companies declined more than 56%

over the six-year period.

Corporates owe close to Rs 42 lakh crore ($637.57 billion), or about 30% of India’s gross

domestic product, to banks as on March 31, 2016, according to RBI data.

While rising NPAs is one reason for the decline in corporate borrowings, declining demand

due to an economic slowdown and the stagnation of existing industrial capacity has also

contributed to the lending downturn.

“Risks to the banking sector remained elevated due to continuous deterioration in asset

quality, low profitability and liquidity,” the RBI warned in this December 2016 report.

The NPAs of public- and private-sector banks were around Rs 6 lakh crore ($89.5 billion) as

of March 2016, Jaitley told the Lok Sabha.

“If NPAs rise, capital gets eroded, forcing banks to lend less,” said Anil Prabhu, general

secretary of the Punjab National Bank Employees Union.

Article by – Business Standard