Govt cost cutting leads to more bad loans for banks

Tags: News
Liquidity in the banking system may continue to be tight for the rest of the current financial year, thanks to the government cutting spending to meet the fiscal target. It may also lead to accretion of bad loans as government agencies will halt payments to companies.

The bigger companies can withstand delayed payments, though the stress is beginning to be felt. Loans to the smaller mid-sized firms are already turning non-performing assets (NPAs).

Sumit Bose, finance secretary, told Financial Chronicle, “The fiscal deficit target may be met by increasing revenue or cutting expenditure, or a combination of both. Even if the government cuts expenditure, government bodies will make payments to their suppliers so there is no problem for companies.”

But cuts in expenditure are already hurting the finances of small and medium enterprises. Banks have reported a rise in NPAs due to delayed payments from government firms. The problem is so widespread that it got a mention in the second quarter review of RBI’s monetary policy on October 29.

RBI then said, “With many large entities holding back on payments, liquidity pressures are building up on small and medium enterprises. A number of firms are facing conditions of financial distress. Remedies partly lie in the speeding up of government and public sector payments, and on measures to channel credit to small and medium enterprises.”

K R Kamath, CMD of Punjab National Bank, said, “Wherever government agencies fail to make payments, there will certainly be pressure on the asset quality, as firms, specially the smaller ones, will find it hard to make loan repayments to banks.”

Nomura expects overall revenue to fall short by Rs 72,000 crore, or 0.6 per cent of GDP, in 2013-14 due to weak growth of 10 per cent net tax revenue year on year, against the government target of 19 per cent. The shortfall in disinvestment is unlikely to be completely offset by higher dividends. It forecasts that the government will cut spending by 0.6 per cent of GDP over the next four months to meet the deficit target.

Parthasarathi Mukherjee, Axis Bank president for large corporates and international banking, said, “If the government cuts expenditure, it will certainly impact liquidity in the system and also the repayment capacity of companies.”

Companies in the infrastructure sector dependent on government payments will be impacted more than others. Already large corporate loans of banks are under stress. At the end of the second quarter the banking system had about Rs 2,30,000 crore in bad loans.

Nikhil Shah, senior director of the turnaround constancy Alvarez & Marsal, said, “Companies will have many streams of revenue; so the government delaying payments may not be such a big issue. It may add to NPAs but it will not be a substantial. Some industries like infrastructure and power companies may be impacted.”

Nomura in its report said, “We see these cuts having two key implications. First, a rising government cash balance will tighten banking system liquidity in Q1 of 2014. Second, growth in government spending should slow to 5.6 per cent year on year in December–March from 17.7 per cent in April-November, which will likely hurt growth. Lower government spending and weak investment demand contribute to our view that GDP growth will remain in the 4.5-5 per cent range until Q2 of 2014.”


  • Long-term health cover makes good sense for both the insurer and the insured

    Long-term health insurance products make enormous sense.


Stay informed on our latest news!


Sarthak Raychaudhuri

vice-president, HR, Asia South Whirlpool of India

GV Nageswara Rao

MD & CEO, IDBI Federal Life

Timothy Moe

Goldman Sachs


Urs Schoettli

America lacks will to contain China

Recently both the Chinese leader Xi Jinping and Indian prime ...

Zehra Naqvi

Exercise gets creative juices flowing

Ever known that feeling of being sluggish and drowsy, of ...

Bubbles Sabharwal

You are what you believe yourself to be

The Gita says a man is what his shraddha is. ...


William D. Green

Chairman & CEO, Accenture