Lending Money safely this season- will RBI’s policy work?

With RBI announcing the second quarter of its monitory policy , Raghuram Rajan and co. took the measures to anchor the rising inflation rate in the country. As expected by most banks and investors, RBI hiked the repo rate by 25 bps from 7.5% to 7.75% increasing the cost of long term borrowings for the banks. However, RBI also cut the MSF (Marginal Standing Facility) rate by 25 bps from 9% to 8.75%, increasing the short term liquidity for the banks, very important as the festive season approaches. In the policy announcement, RBI also raised the liquidity provided through term repos from 0.25% of NDTL (Net Demand and Time Liabilities) to 0.5% of NDTL. This will ease the short term liquidity for the banks.
After the rupee stabilized, Inflation has been the key issue on the cards for RBI. Since WPI (Wholesale Price Index) was only a partial indicator of the inflation, RBI had also been taking into account the CPI (Consumer Price Index), since CPI is an effective indicator of inflation faced by common people. In times when the retail inflation (CPI) is up by 18.40%, mainly driven due to the high vegetable prices and also WPI up by 6.46%, there is often short term liquidity crunch at the consumer level as well as for the SMEs (Small and Medium Enterprise) and the emerging businesses especially during the time of festive season. By providing ease in short term liquidity through cut in MSF rate and increase in term repos for 7-day and 14-day loan period, the rates of short term loans would remain low.
However when the ease of liquidity to the banks has been provided by RBI what needs to be checked is the quality of loans that the bank issues. The NPAs has been a growing concern for the banks this year with the gross NPAs of 40 publicly traded banks rising by 40% to Rs 2.08 trillion, there arises a significant need to manage the NPAs. Due to the stricter norms enforced by the government it becomes difficult for public sector banks to recover these assets. As recently said by Ms Arundhati Bhattacharya, chairperson, SBI, in a TV interview, the bank needs to carry out two rounds of auction before capitalizing these assets and the capitalization is also a very time consuming procedure which also leads to deterioration of the assets being capitalized at a lower value than expected. The growing NPAs and their late recovery causes a number of problems for the banks. First and foremost impact is on the liquidity of the bank. The capital which is lent out when not received in time causes the short term liquidity crunch for the banks due to which they have to borrow short term capital from RBI or other banks which further increases the costs of the banks. This also results in genuine borrowers unable to borrow money. Another impact is on its profitability, the accumulating NPAs spoils the balance sheets and the opportunity cost in terms of profits being able to invest elsewhere is lost which hinders growth. Another impact is in terms of the credit that the brand has got in the market is lost.
Analysis of the sector wise NPAs on year on year basis in the BCG’s report on Indian banking gives an indication that the gross NPAs in retail sector has reduced while that in Agriculture, MSMEs, and corporate has increased by an average of 1.26% as compared to last year. A sizable chunk of these NPAs is contributed by large firms with most of them having a presence in energy and infrastructure sector accounting for 14% of the total NPAs. The infrastructure sector being crucial for the development of any country holds significant importance in terms of investments. The rising NPAs in this particular sector is mainly due to lack or delayed forest and environment clearances and land acquisition and rehabilitation settlements extending the timeline of the project. With the new Land acquisition and rehabilitation bill in place, the process is likely to speed up helping the projects to meet their deadline and thus decrease the NPAs in this sector in upcoming financial year. Another important contributor to the growing NPAs has been the power sector. The rising NPAs in this sector has been due to the rising fuel side concerns, government’s pressure to keep the electricity prices low despite rising production costs, and AT&C losses. The rising fuel costs and increased dependency on imported fuel with rising exchange rate has shut down many power plants unable to recover their costs and thus accounting for as NPAs. The studies carried out by SBI capital markets show that the AT&C losses in some states has been as high as 50% making AT&C losses an important factor leading to rising debts in this sector.
The government’s enforcement to continue the priority sector lending and the economic slowdown in the current financial year will make it difficult for the banks to manage the rising NPAs. Given the liquidity that is poured in by RBI this festive season, the banks really need to take into account deeper data analysis and research before lending the money out.
[The article has been written by Darshit PaunHe is a mechanical engineer by profession and currently pursuing his MBA (Energy & Infrastructure) from School of Petroleum Management, PDPU, Gandhinagar. He is also an editor of his college monthly SPM Mirror. As a part of his growing interest in Finance he has completed a foundation certified course in Finance and Banking Fundamentals. He can be reached on twitter @darshitpaun]

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