Worthy of credit

EDITORIAL

The clamour for growth in our slowing economy should not make us take the path of subprime credit. The risks of pushing bank credit to less than creditworthy borrowers are well known in the wake of the 2008 global financial crisis. India cannot afford to make the same mistake of creating a credit bubble. Lending is their prime business, but banks must at all time lend only to the creditworthy, be they in the large corporate sector or small and medium enterprises (SMEs). At these times of financial turmoil, when bad debts in the books of banks are on the rise, they need to be doubly careful. There are well-defined prudential norms, prescribed by the banking regulator, the Reserve Bank of India (RBI), which have served the Indian financial sector rather well in the face of global turmoil. These norms impose on the banks a substantial financial burden and impact their profitability as has been seen during the first three quarters of this financial year. But, it is in the interest of the financial sector’s stability and the whole economy that there should be no let-up. Unfortunately, for banks in India, despite reforms that have given them greater commercial freedom, the economic realities do impose on them certain social obligations in the form of policies such as those on priority sector lending and financial inclusion. But fortunately, lending to priority sectors such as agriculture, exports and small businesses are no longer a drag on banks’ profitability. These are viable businesses that banks must cash in on. It is true that the 9 per cent plus GDP growth in India for three years preceding the global financial crisis in 2008-09 and the 8 per cent-plus growth in the following two years was possible because of liberal credit supply. It is also true that the cautious approach to lending by banks in 2011-12 coupled with high cost of credit has adversely affected trade and industry, both large and small. It is known that banks have mostly lent to SMEs at higher rates than to big corporate borrowers, thereby, virtually cross-subsidising the big at the cost of the small. The new regulations prescribing that banks must not lend below their announced benchmark prime lending rate to any borrower may have prevented select large clients from getting preferred rates but have not made credit to SMEs cheaper. In fact, the high interest rate regime followed by RBI this year to fight inflation has made credit dearer for all businesses, but especially for SMEs. High interest costs coupled with the slowdown have resulted in higher bad loans for banks quarter after quarter this year. It is now apprehended that bad loans, called non-performing assets in banking parlance, could climb to as high as 5 per cent of total advances at the end of the present quarter. That’s bad news for banks’ profitability because they have to make provisions for these bad debts in their books. The banks are rightly adopting a cautious approach to lending. Most bad loans are in telecom, steel, mining sectors and SMEs. The repayment ability in telecom, steel and mining has been affected mainly by government policies but that of SMEs by high cost of credit. Big or small, creditworthy clients spell no problem for banks.