Are banks playing it too safe?

Mon, 29 Apr Pre-Open

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The sluggish investment climate is a trend that the government has been trying to reverse over the past few months. However while India Inc. is grappling with slowing growth, a sea-change in the investment trend seems to indicate that GDP growth will have to wait a while. While on one side, there are factors such as delays in the form of land acquisition and project clearance, on the other, bank financing is also an area of concern.

As reported by Mint recently, bank credit to the corporate sector - small, medium and large - has declined during the first eleven months of FY13 as compared to the corresponding period of the previous year. While the growth in outstanding loans on a YoY basis to small/ micro firms and large firms has slowed down considerably, total loans outstanding to medium-sized companies contracted by a sharp 11% during the period!

It may be noted that companies having investments in plant and machinery of more than of Rs 100 m are termed as large companies, while those having investments in the range of Rs 50 m to Rs 100 m fall under the medium sized company segment. Investments in plant and machinery of less than Rs 50 fall under the category of small sized firms.

Growth in total outstanding loans to large companies slowed down to 13% during FY13 from about 18-19% YoY growth during the corresponding period of the previous year. Exposure to this segment nevertheless remains the largest for banks. That large sized companies have AAA credit rating is a key reason for banking willingness to fund projects of blue chip companies.

With the reduction in exposure to the corporate sector, banks seem to have switched their focus towards the retail segment. This includes the housing loans, vehicles loans, credit card, retail trade and other personal loans.

How will this affect GDP? We believe that given the overall slowdown in the economy, the possibilities of the financial performance of small and medium companies being impacted are high. This would increase the chances of such loans turning bad. However, with banks continuing to increase outstanding loans to large companies - who generally have high credit ratings - albeit at a slower pace, it does seem like banks are looking to play safe. And it is quite possible they would continue to do so till the time things are not clear from the government's side in terms of making the key structural changes. These include coming up with a plan how to fast track projects that have been put on hold - not only the large sized ones, but even those which includes those taken up by small and medium companies. Not to mention that in these uncertain times, banks are looking to curb the volatility in their earnings by reducing the risks of provisioning.

While investors may assume that banks are being prudent by keeping away loans to SMEs, we believe it is imperative that the government comes to the rescue of the smaller enterprises. At least by ensuring that projects that are already funded do not become unviable. Else the potential of strong GDP growth being sustainable in the economy over the long term will take a backseat.