With the expected growth of 60% of its total advances, the banks are likely to focus more on retail loans.
Former Governor of RBI, Raghuram Rajan cautioned, “Both Mudra loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk.”
The size of India’s corporate debt, relative to GDP, is much lower than other major economies such as the US (72%) and the European Union (105%).
MUDRA loans are offered under the Prime Minister Mudra Yojana or PMMY, launched in 2015 by the NDA government. It is for providing loans up to Rs. 10 lakhs to the non-corporate, non-farm small/micro enterprises.
A total of Rs. 6.37 lakh crore has been disbursed under the scheme by public and private sector banks, regional rural banks and micro-finance institutions till date, as per data from the Micro Units Development and Refinance Agency (MUDRA) website. A total of Rs 82,440 crore has so far been disbursed under the scheme in the financial year 2018-2019. Since these loans were given without collateral there is a very slim possibility of recovery if and when the loans go bad. What seems more troubling is that many bank executives are learned to have aided the piling of stressed assets by conniving with the loaned.
Agricultural loan outstanding is at Rs 12.6 lakh crore as of September 2016. Agricultural loans are available for a multitude of farming purposes. Farmers may apply for loans to buy inputs for the cultivation of food grain crops as well as for horticulture, aquaculture, animal husbandry, floriculture, and sericulture businesses. There are also special loans to finance the purchase of agricultural machinery such as tractors, harvesters, and trucks. Construction of biogas plants and irrigation systems as well as the purchase of agricultural land may also be financed through special types of agricultural finance.
Banks and RRB’s introduced the Kisan Credit Card Scheme of NABARD in their areas of operation. In this scheme, eligible farmers are provided with a Kisan Credit Card and a passbook or card-cum-pass book. This limit is fixed on the basis of operational land holding, cropping pattern and the scale of finance. The main problem here is political interference. There is, of course, the risk of loan waiver, but banks are normally compensated in such cases.
According to the Bank for International Settlements (BIS), India’s corporate debt-to-GDP ratio stood at 51% of GDP as of 31 March 2016. The size of India’s corporate debt, relative to GDP, is much lower than other major economies such as the US (72%) and the European Union (105%). However, Indian corporates’ ability to meet interest expenses is among the lowest.
Rajan also said “Clearly, bankers were overconfident and probably did too little due diligence for some of these loans.”
The aggregate non-performing assets of the banking sector stood at Rs6.5 lakh crore, or 8.6% of loans, at the end of June 2016. On this basis, the total loan outstanding comes to about 76 lakh crores. Adding another 3.5% of restructured loans, the total amount of “impaired” debt in the banking sector rises to 12.1%, according to a 19 September Credit Suisse research report. The report also warned that another 4.5%, or Rs3.3 lakh crore, of loans, are still to be recognized as NPAs or restructured assets, suggesting that the actual ratio of impaired assets of India’s banking sector is over 16%. RBI identifies 12 mega corporate defaulters for insolvency, their total NPA Rs 1.75 lakh crore.
It is thus clearly established that the incidence of default risk is predominantly in the corporate and especially large value advances and the NPA accrual is also predominantly in this sector.
Rajan also said “Clearly, bankers were overconfident and probably did too little due diligence for some of these loans. Many did no independent analysis and placed excessive reliance on SBI Caps and IDBI to do the necessary due diligence. Such outsourcing of analysis is a weakness in the system, and multiplies the possibilities for undue influence”. This explains how the banks lacked expertise in long-term risk assessment and the large corporate loans mostly went bad.
The retail segment of the bank will include all loans up to Rs 40 crore. Agriculture advances and loans to the small and medium enterprises will also be classified as retail advances.
On the other hand, Retail lending is a volume driven, small ticket size and operations intensive business which requires an architecture for micro-management of controlling default and associated fraud risks. Retail Risk Management has to focus on short-term risks at all stages of the business cycle right from the business sourcing stage to recovery stage. Further, with the adoption of GST, banks and finance companies are now, willing to consider making lending decisions, not on the basis of the collateral offered by a borrower but on the basis of sales reports as indicated in the GST filings.
It is now understood that companies may find it difficult to get corporate credit from State Bank of India (SBI) with the bank focusing on public sector undertakings like oil companies and investment-grade firms to control its non-performing assets (NPAs) which have hit Rs 2.23 lakh crore, constituting 10.91% of its total advances. Instead, the bank will focus on retail loans which it expects to grow to 60% of its total advances. The retail portfolio accounts for just 1% of the bank’s total NPA while it is 10.91% for the total advances.
Rajan Kumar Mishra, the chief general manager in charge of personal banking, said, “We have the largest portfolio for auto loans with a market share of 30%. For personal loans, the bank has a market share of 35% and for education loans, we have about 35% of the market share.
The total advances of the bank at the end of the fourth quarter (2018) was Rs 20,48,387 crore and domestic advances were Rs 17,463,89 crore. The retail segment of the bank will include all loans up to Rs 40 crore. Agriculture advances and loans to the small and medium enterprises will also be classified as retail advances.
Portfolio analyses in other banks would give similar findings and therefore for business growth, the banks are likely to focus from now on more and more on retail advances.
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.