Sunday, 22 May, 2022
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Our dark financial tunnel could get longer — that’s the message from bad loans of SBI Cards

Credit card debt as a percentage of the total is tiny, but it is expensive credit, and default is usually a sign that personal finances are in trouble.

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It could be the canary in the coalmine: SBI Cards and Payments has reported a trebling of its bad loan percentage in just one quarter. If it had not been for the moratorium order preventing the full recognition of delinquency, the bad loan ratio would have jumped more than five-fold, from 1.4 per cent to 7.5 per cent. Credit card debt as a percentage of the total is tiny, but it is expensive credit and default is usually a sign that personal finances are in trouble. So does this development have a larger significance?

In the last couple of years, the government-owned banks had mimicked some private banks and switched their focus from industrial credit to retail and service sector loans, which now account for over half the total loan book. This had followed the realisation that industrial loans (especially to large companies) often ran into trouble. Bad debts were as high as 17.6 per cent, most of it involving large borrowers, even as bank scams continued to flourish — 90 per cent of them in the government’s banks, which clearly face continuing problems in assessing risk and spotting scamsters. And so, retail and service sector loans have grown rapidly, some sub-sectors at 20 per cent and 30 per cent, year on year, even as industrial loans have stagnated.

Now, if credit card delinquency spells trouble, there may be questions with regard to the much bigger retail sub-categories of car and housing loans. India has only 57 million credit cards (debit cards are many multiples of that), and are mostly held by people in the top 10 per cent of households. If delinquency rates soar in this category, it speaks of financial stress in even the relatively privileged homes whose people have (or had) jobs in the formal sector, or who run small businesses that may or may not be in trouble. The full picture will become clear as more data emerges.

As it happens, the government-owned banks had just begun to see light at the end of a dark, five-year-long tunnel. The massive write-offs that began in 2015-16 had begun to taper off by 2019-20, though the majority of these banks were still in the red. The government in turn had probably hoped that its annual cash infusion to bolster the capital of these banks (a treasury-emptying Rs 2.66 lakh crore in the three years to 2019-20) was coming to an end — specially with some of the weaker banks being merged with stronger ones. Still, given their poor levels of recovery on written-off loans, government banks have not done anywhere near enough provisioning. The shortfall, when made up, will put stress on capital adequacy. In addition, if Covid-19 causes fresh havoc to government-bank finances, it could be back to the old story of large-scale losses, prompting further capital infusion.

Also read: Five charts that show how bad things are for Indian consumers

We won’t know for a while how good or bad the story is going to be, which is why the development with SBI Cards is still only a canary, i.e. an early warning. The moratorium on loans till August, followed by permission for a fresh but selective restructuring of loans, is based on sound logic in that special circumstances require exceptions to the usual rules. Businesses that are otherwise sound should be given breathing space to get back on their feet. But such steps also delay the full discovery of credit quality. Especially with the Supreme Court getting into the act on what interest banks can or cannot charge, and uncertainty about whether the government will pay the foregone interest to the banks, we are in uncharted territory. A year from now, it may look like the dark financial tunnel has got longer.

The government now talks more openly than before of outright privatisation of some of its smaller banks. Ironically, the repeated rounds of capital infusion have meant that government ownership in these banks has increased proportionately. Yet sale will have to be at poor valuations, since all of them quote at significant discounts to book value. Questions could be asked even 20 years later, as Arun Shourie has discovered about that Udaipur hotel.

By Special Arrangement with Business Standard.

Also read: Modi floats like a butterfly past problems & makes new promises. But the maths will catch up


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  1. We need to first rein in the Supreme court. If the court indeed gets into interest waiver or anything similar because the situation is bad, it will set a precedent. Tomorrow a flood victim will go to the supreme court ask for a waiver…then it will be someone who has lost an earning family member…i am highly disappointed in the RBI and govt because both couldn’t stand up to the supreme court. The ugly overreach needs to be corrected and the supreme court should be shown its place… dealing with law and not economics. This precedent will add a lot of uncertainty.

  2. This is a well written and very interesting article. The Indian banking system faces toughest time after the 2008 global financial meltdown. Yes, the warning signals of spread of the NPA virus in the lending to the retail sector are quite visible. We should not have expected otherwise after the impact of the Covid-19 pandemic. But the story doesn’t end here. In April 2020, Tamal Bandyopadhyay wrote in his column in the Business Standard. :“In value terms, of the Rs88,000 crore micro loans, Rs19,000 crore or 21.59 per cent is stressed. In small loans, out of Rs12.35 trillion, Rs40,000 crore or 3.24 per cent is stressed. Of the Rs4.51 trillion medium loans, Rs15,000 crore or 3.33 per cent is stressed. The least stress is in the large loans – 2.57 per cent or Rs1.2 trillion, out of Rs46.72 trillion .Overall, Rs1.94 trillion or 3.01 per cent of the commercial loans is showing incipient stress. Let’s focus on the retail loans — mortgages, auto and two-wheeler loans, loans to buy consumer durables, personal loans, education loans, credit cards, et al. Over the past few years, the amount of consumer loans, personal loans and credit cards have been swelling, signaling rise in consumption. There are 236 million such live loans and 14.8 million of them are stressed. The value of the entire retail portfolio in the system is Rs53 trillion and the stress is far more than the commercial loans — Rs4.1 trillion or 7.74 per cent.” Should we expect a flood of NPAs in the retail sector after the moratorium is lifted? But then what choices do the Indian Banks have? Corporate lending has been a disaster- it is a the sad saga of massive accumulation of NPAs and consequent write offs which had a debilitating impact on the banking industry, more particularly the government owned banks and still the government is pushing these banks to lend more. However, lending to the corporate sector has to be selective and cautious. There are many large groups who are over-leveraged and burdened with mounting debt. The RBI Prudential Exposure Norms stipulate restrictions on the bank-wise exposure to industrial groups; but what is the control on the overall exposure of the entire banking system to an industrial group? Does RBI monitor this? Let us take an example of the Adani group.. The group has total burden of Rs. 1.3 lakh crore and the group is still expanding and borrowing more. The group’s position upto 2018 was reported as under :” The Adani Group’s six listed companies, which account for almost all of its Rs 77,000 crore turnover, had operating profits of Rs 20,141 crore in 2017-’18. After accounting for interest payments, tax, depreciation and other charges, their combined net profit stands at Rs 3,455.34 crore.” The current position is not known to me. I have no malice towards them. But if the exposure becomes NPA what would happen to India’s banking system?
    So, what is the way out? Deposits are growing at rapid pace but lending opportunities are restricted. The REPO window gives a measly return of just 3.5%. The options are obviously limited . Needles to add, lending is the dharma for banks. The surest way of incurring losses is to stop lending. But extreme caution and selective lending has to be exercised while lending to the corporate sector. Retail sector window cannot be blocked, as it offers only viable hope to Indian banks.
    In the end, I think that the grouse against government owned banks is ill-founded. Most of them have very comfortable Provision coverage Ratios and the NPA loss has now been almost been covered. Here is the data of big six of PSU banks :IDBI Bank (95.96%), SBI (83.62%), BoB (83.3%), PNB (77.79%), Canara Bank (75.86%) and Union Bank (73.6%). Thus, we should be concerned not about PSU Banks but about private sector banks. The Yes Bank saga is quite fresh in mind. Laxmi Vilas Bank and Dhanlaxmi Banks are in hot waters. If they fail, who would protect their depositors? The failed PMC Bank had lent more than 70% of its credit to one group and it failed due to fraud and cheating. Now, which government owned bank has NPAs of around 70%?

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