The pandemic made the life of bankers somewhat difficult during 2021 - particularly the second wave. Even as the balance sheets of banks were gradually being restructured, the pain became prolonged owing to the resurgence of the pandemic during April - June, 2021 period. Some segments of the economy which were hit hard by the first wave in 2020, and were hoping to recover in 2021 had their agony prolonged.
One factor which contributed to some companies riding out of the impact of pandemic better was the level of debt in the balance sheet. The larger and better rated companies were able to take benefit of the lower rates of interest and bring their borrowing costs to lower levels, significantly improving their profitability. In fact, if one is to look at the Companies constituting NIFTY index and the NIFTY Next 50 Index, they either became debt-free or substantially debt-free.
Structural Change
Over the last six or seven years, Banks have lost - substantially - their working capital clientele belonging to AAA and AA rated corporates to mutual funds and market instruments. These clients are unlikely to come back.
According to RBI data, the monthly fresh issuance of commercial papers (CP) jumped over 37 per cent year-on-year to Rs 1.71-lakh crore in June 2021 against Rs 1.25-lakh crore during the same month in the previous year. In fact, the monthly CP issuance of Rs 2.24-lakh crore in March 2021 is the highest in the last 14 months.
This actually means banks must lend more to the medium and MSME segments. This is because banking systems continues to be largest recipient of savings in the economy; however, the mutual fund industry is today close to 20 percent of the banking system.
The MF Industry’s AUM has grown from Rs 16.50 trillion as on November 30, 2016 to Rs 37.34 trillion as on November 30, 2021, more than 2-fold increase in a span of 5 years, a growth rate of around 14 percent CAGR. The industry’s AUM had crossed the milestone of Rs 10 trillion (Rs 10 lakh Crore) for the first time in May 2014 and in a short span of about three years, the AUM size had increased more than two folds and crossed Rs 20 trillion (Rs 20 lakh crore) for the first time in August 2017.
The AUM size crossed Rs 30 trillion (Rs 30 lakh crore) for the first time in November 2020. The Industry AUM stood at Rs 37.34 trillion (Rs 37.34 lakh crore) as on November 30, 2021.
Compare this with the growth of banking industry - as per RBI report (Trend and Progress of Banking in India, the Indian Banking system deposits grew to Rs 180 trillion at the end of December, 2020 from Rs 166 trillion at the end of December, 2019 - a growth rate of just 8.1 percent in Bank deposits. The middle and upper middle-class savers have moved much of their savings to mutual funds from bank deposits, at least in metropolitan and urban areas.
With the credit demand being at all time low, banks are deploying their surplus funds with RBI at a reverse repo rate of 3.35 percent. They are, therefore, holding their deposit rates at near all-time low levels. These low deposit rates have driven the more knowledgeable depositors to mutual funds, in search of higher yields.
Why are banks not lending?
Between 2015 and 2021, private sector banks’ share in loans in India has risen from 21.6 percent to over 36 percent; during the same period the share of public sector banks in total loans has fallen from 74.3 percent to 59.8 percent. Why is this happening? The number of private sector banks has increased during this period - apart from Bandhan Bank and IDFC Bank, 10 new small finance banks have also started operations (these were NBFCs converted in to banks).
An equally important factor has been action against bank officials in respect of loans which turned bad. These factors combined to make the officials of PSU banks highly risk-averse.
An equally important change which has taken place in private sector banks during this period was the rapid growth of retail loans - vehicle loans, home loans, personal loans etc - to a level where the retail loans at the end of March, 2021 constitute 29 percent of their total loan portfolio.
The PSU banks actually have the ability to outstrip the growth of private sector banks in retail loans owing to their vast network of branches and their low cost of deposits. However, they have been unable to train their staff adequately, put in place operational and technological controls across their vast network; though they have somewhat achieved this in select geographies. The old private sector banks also continued to languish like their PSU bank peers.
Current trends in lending
Given the risk aversion in PSU banks, and the nimbleness of NBFCs and HFCs (particularly in the affordable housing lending segment), as also spurred by RBI policy changes, co-lending is gradually becoming the trend. Loans to MSMEs, and affordable HFCs are the core of NBFC and HFC lending book; they understand these clientele better; their oversight and monitoring is better.
Large banks - be they PSU banks or the larger (new) private sector banks like ICICI Bank and HDFC Bank are signing co-lending arrangements with NBFCs and HFCs. However, the larger banks need a minimum monthly co-lending book size of about Rs 75 to Rs.100 crores if not a larger amount. This means the NBFC must have a capacity to originate at least Rs 120 crores of new disbursed loans every month (the originating NBFC or HFC must retain 20 percent of the loan in its books as per current RBI policy). In other words, annually thee NBFCs / HFCs need to lend Rs 1,500 crores with a record of good collections (low NPLs). There are not more than 20 /25 HFCs and NBFCs which have this size and reach.
What does 2021 portend for Banks?
Unless PSU banks get their act right, they will continue to lose their market share particularly in lending. In the area of deposits, PSU Banks are under pressure, but have benefited from the failure of a series of cooperative banks. Depositors from the cooperative banks have moved to PSU banks in their search for safety of their deposits. However, the pressure from Mutual Funds seems to be hitting not merely the PSU banks but also the larger private sector banks.
The second is the delinking of CVC and CBI from having oversight over PSU banks will need to be considered. It is quite possible to learn from the private sector banking counterparts as to how they handle bad loans and accountability can be built in to an independent structure manned by bankers who have in-depth knowledge of lending approaches and controls. Only when these two are achieved will the PSU banks recover their mojo. Of course, like in private sector banks, pay and emoluments would need to go hand-in hand with acceptable level of results.
Private sector banks themselves are becoming bigger. This has led to the marginalization of many of the old private sector banks. Already banks like Lakshmi Vilas Bank have disappeared.
Clearly, growth of banks will be driven by ability to attract talent, ability to harness technology, understanding and running risk and lastly ability to deliver sustained growth to be able to raise capital continuously. Unfortunately, not all management teams in banks as they seem to appear today would be able to deliver on all these parameters.
We can therefore see more mergers in private sector between banks as well as between banks and NFCs / HFCs. How many of those mergers will actually deliver results is another thing to be watched for.
(Ravikumar Puranam is a veteran banker and honorary fellow of The Chartered Institute for Securities & Investment, UK.)
