As loan books of PSBs shrink, bank credit growth at 20-year low

12 out of 21 public sector banks reported declines in their loan books in the last financial year against seven such banks in 2015-16 and none in 2013-14.

Illustration: Uttam Ghosh/Rediff.com.

Bank credit growth declined to a 20-year low in 2016-17 due to a virtual freeze in new loans by public sector banks.

The combined advances of 32 listed public and private sector banks were up just 1.7 per cent, year on year, during 2016-17, growing at their slowest pace since 1995-96.

Advances were up 6.8 per cent in 2015-16.

Comparable data are not available for individual banks prior to 1995-96 and all data are in rupee terms.

Incremental advances were down 73 per cent, year on year, to Rs 1.23 lakh crore (around $19 billion) in 2016-17, the lowest in the last 14 years.

Incremental advances were Rs 4.52 lakh crore in 2015-16 and Rs 7.9 lakh crore at their peak in 2013-14. (See chart)

In all, 12 out of 21 public sector banks reported declines in their loan books in the last financial year against seven such banks in 2015-16 and none in 2013-14. This includes the country's largest lender State Bank of India at the group level.

Some of the other PSU banks reporting declines in their loan books are Central Bank of India, IDBI Bank, Indian Overseas Bank, Bank of Maharashtra, Dena Bank, Allahabad Bank, Indian Bank and United Bank of India.

The combined advances by the 21 listed public sector banks in the Business Standard sample were down 2.5 per cent in 2016-17 as the majority of them shrank their loan books due to fears of bad loans.

Public sector banks together shrank their loan book by Rs 1.34 lakh crore in 2016-17, the first such decline since 1995-96.

In other words, loan repayments by existing customers exceeded new loan disbursals during the last financial year.

PSU banks had provided incremental loans worth Rs 1.34 lakh crore in 2015-16 and a little over Rs 6 lakh crore at their peak in 2013-14.

In contrast, advances by private sector banks were up 14.9 per cent, year on year, in 2016-17.

Their credit growth was 22.5 per cent in 2015-16. Private sector banks provided fresh loans worth Rs 2.6 lakh crore in 2016-17, down from Rs 3.2 lakh crore in the previous year but still higher than in years prior to that.

The analysis is based on the audited annual balance sheets of 32 listed banks in the public and private sectors.

The combined figures have been adjusted for a string of mergers and acquisitions over the last two decades to make the time-series data comparable.

Experts attribute this to risk aversion among public sector banks over bad loans and a general slowdown in corporate investment.

“There is now a reluctance among public sector banks to provide fresh corporate loans due to fears of creating more bad loans. Besides, the demand for term loans is down as very few corporates are making large investments currently.

Incremental growth is now largely in the retail segment where PSUs banks are small players," said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

Combined term loans by the public sector banks in the sample were down 4 per cent in 2016-17 against 2.7 per cent growth in the previous year.

Other experts said most PSUs were not in a position to make big loans due to their weak balance sheets.

“The losses from bad loans have eroded the capital for most government-owned banks and recapitalisation from the government has been inadequate.

"This has forced quite a few PSU banks out of the corporate lending business,” said Dhananjay Sinha, head of research, economist and strategist at Emkay Global Financial Services.

PSU banks' corporate lending has also been affected by the recent decline in interest rates in the bond markets.

“Regulations do not allow banks to lend at rates below their MCLR, but interest rates on bonds and commercial paper are now lower than the MCLR for most PSU banks.

As a result, most top-rated companies are now borrowing from the bond market,” said Karthik Srinivisan, senior vice-president and head of financial sector ratings at ICRA.

MCLR is the marginal cost of lending rate for banks. Experts do not see an immediate turnaround in bank credit growth, given the challenges facing public sector banks.

“PSU banks still account for nearly two-thirds of the corporate lending and unless they start growing their loan books, recovery in credit growth appears distant.

"This will require large capital infusion from the government which looks unlikely with new fiscal commitments such as farm loan waivers,” Sinha said.

This spells trouble for the prospects of a turnaround in the corporate capital expenditure cycle and faster economic growth.