India\u2019s banking community would like to sing the 1929 Leo Reisman song Happy days are here again, best remembered as the campaign song for Franklin Roosevelt\u2019s successful 1932 presidential campaign. The banks just closed all formalities for a Rs.35,000 crore project loan for Tata Steel Ltd, India\u2019s largest steel maker, and around Rs.9,900 crore long-term loan for Hindalco Industries Ltd, the world\u2019s largest aluminium rolling company.
\nThese loans could be harbingers of change for the banking industry, which hasn\u2019t seen too many corporations approaching it for loans. Even those who have their loans already sanctioned are not lifting them as nobody is willing to invest when uncertainties envelop a sagging economy. In the current fiscal year till the first week of September, loan growth has been just 3%, lowest since 2009 when the world experienced the worst credit crunch in history, against a deposit growth of 7%. In absolute terms, banks have disbursed Rs.1.38 trillion loans, roughly a third of deposits (Rs.4.12 trillion) they have collected.
\nOn a year-on-year basis\u2014between October 2011 and September 2012\u2014bank credit has grown 16.6%. This is lower than the 20.4% growth in the previous year. The Reserve Bank of India\u2019s (RBI) loan growth projection for the current fiscal is 17%.
\nOne reason behind the tardy credit growth is high interest rates. After raising its policy rate 13 times in past two years to rein in high inflation, RBI cut its policy rate by half a percentage point in April, but all banks have not reduced their loan rates as yet. By raising the interest rate, RBI has to some extent been able to dampen demand, which is needed to fight inflation, and the scenario won\u2019t change overnight. India\u2019s gross domestic product grew at 5.5% in the first quarter of fiscal 2013 against a 8% growth in the first quarter of 2012. Loans given to industrial units have slowed considerably while agriculture and allied sectors continue to draw money from banks. Some of the large state-run banks\u2019 international loan books have grown well but most are seeing a lack of appetite for money in their borrowers. The nation\u2019s largest lender State Bank of India\u2019s deposit liability in the first five months of the fiscal year grew three times higher than its loan book. It is buying short-term treasury bills to cover the cost of money while staying liquid to meet the loan demand of corporations as and when they return.
\nBanks have not been aggressively pushing for loan growth for fear of rising bad loans as borrowers\u2019 ability of paying back loans gets eroded when rates are high. Besides, state-run banks seem to be in the grip of a fear psychosis after a series of investigations by government agencies of bank lending to the telecom, mining and real estate sectors. This has affected decision-making at most banks. There have been multiple investigations on allegations of irregularities in the allocation of second-generation telecom spectrum and licences and in the offer of coalfields to companies for captive use. Bankers have also been grappling with an uncertain investment climate after the revelations of improprieties and flawed government policies in the allocation of natural resources.
\nClearance of the two large loans have coincided with the government push for reforms that started in mid-September with the rise in diesel prices and capping of highly subsidized cooking gas cylinders along with opening up aviation and retail sectors to foreign investors, bulldozing stiff political opposition. Typically, such loans take months to close all the formalities and their closure is in no way connected with the spurt in economic reforms but they can certainly help change the investment climate for the better. They will encourage borrowers to take a relook at those projects that they had shelved and bankers to get over their fear psychosis. Indeed, things are changing for the better. Since mid-September, Sensex, the bellwether equity index of BSE, has risen 4.12% and the rupee has gained 4.83% against the dollar. Foreign institutional investors have bought Indian stocks worth $3.1 billion in the last fortnight, net of selling. Things will get even better if the government demonstrates its resolve to sort out issues related to labour, land acquisition and mining laws.
\nThe time is not right as yet for celebration but bankers should feel happy that at least a new beginning is being made. They should thank the following persons for the dramatic change in business sentiment:
\n\u2022 Congress president Sonia Gandhi, for sending former finance minister Pranab Mukherjee to the Rashtrapati Bhavan after a disastrous 2013 budget. Mukherjee\u2019s proclivity to blame coalition politics for the government\u2019s inertia to push for reforms had done the maximum damage to the country.
\n\u2022 Palaniappan Chidambaram, for quickly undoing the damage.
\n\u2022 Prime Minister Manmohan Singh, for reliving the 1991 days when India, faced with its worst balance of payment of crisis, was forced to open up the economy. Singh was the country\u2019s finance minister then. After a 21-year long sleep, Singh, who turned 80 on 26 September, finally decided to call the bluff of Mamata Banerjee\u2019s politics.
\n\u2022 India\u2019s top auditor Vinod Rai. After all, the trigger for reforms is the government\u2019s desperation to divert attention from massive irregularities and loot of government money that Rai has relentlessly been pointing out.
\n\u2022 And, finally, the global rating agencies. Had there been no threat of downgrades, the government wouldn\u2019t have bitten the bullet.
\nIndian economy is not out of the woods as yet but the flow of foreign money and the rupee\u2019s appreciation are for certain now even though inflation remains a worry. That\u2019s a challenge for RBI. The banking sector\u2019s challenge is to give money to corporations and make sure the loans do not turn bad.<\/p>\n","protected":false},"excerpt":{"rendered":"
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