Notwithstanding the assurance of the that the hoary past need not come in the way of future, for public sector banks fear is still writ large on the 3 Cs — CBI, CVO and CAG. This has engineered risk-aversion among credit analysts and decision-makers.
The biggest challenge facing the financing institutions today is how to convert this risk aversion into risk appetite. Despite the government opening a window of confidence with acceptable guarantee for 20% additional working capital to standard MSME assets, aggregating to Rs 3 lakh crore, and Rs 20,000 cr subordinated debt window for stressed and NPA assets over a 10-year period, banks are on the backfoot. Prime Minister Modi had to recently convene a special meeting of banks and NBFCs to exhort them to lend and view NPAs with a different lens for enabling revival.
Liquidity is no issue as the RBI has pumped enough of it – Rs 8.2 lakh crore. Interest rate risk too has been on the lower side with depositors still looking at banks for safety of their funds more than the earnings. Market risk and operational risks are, of course, mounting with high pandemic uncertainties.
Politically stable, sovereign risks would be low. Modi, at frequent intervals, reassures the investors that they are safe and return-secure in India. The reasons are not far to seek. We have a stable monsoon and rising rural India. The share of agriculture in GDP, currently at 14-15%, would be around 25% in a couple of years. History has proved that India’s prosperity is inextricably linked to agriculture.
Rating agency Crisil in its June 2020 report says 44% of the debt is in high-resilience sectors like pharmaceuticals, fertilizers, oil refineries, power, gas distribution and transmission due to the essential nature of products and even government support in some. 52% of the debt is in medium-resilience sectors against the expectation of consumer demand continuing to look stable to a rise.
The big question, however, remains: will this lead to lower NPAs? The RBI in its latest Financial Stability Review Report discounts any such expectations. On the other hand, it expects it to hover around 14%. Cyber risks, frauds and money laundering have been on the rise. On top, loss of jobs is predicted in the range of 50% by several online surveys. It is too simplistic to say that this macro-level risk map has all ingredients for exercising severe caution on credit risk.
Working in a regime governed by around 105 laws, lending long and borrowing short for activities like infrastructure, telecom and power sectors with no expertise of risk assessment, overwhelmed by externalities and stunning reforms like the IBC Code and GST have left the banks’ top management with a leadership challenge. Branch banking has been left to the machines. Decision-making has become more centralised and committee-oriented with little scope for objectivity and transparency.
The twin aspects of credit risk – moral hazard and adverse selection — have taken a front seat. Banks have more data on borrower than before but are unable to utilise for taking quick decisions. Borrowers, unlike in the normal circumstances, have no incentive to conceal information or act in a way that does not reflect lender’s interests.
The increase in information and transaction costs has forced many banks to keep wider margins between the prime lending rate and actual lending rates. Interest rate risks, including cost of funds, default risk of loan and rates of return available from alternative investments, have been varying in proportion to the information and transaction costs. In Covid times, the interest rate risk is more a policy transmission. Liquidity pumped into banks through fundamental changes in policy rates gives enough net interest margin (difference between interest paid and interest received) to banks to earn profit if they do diligent lending, faster than usual.
Yet, this did not happen for the simple reason that the bank staff are used to lending to real estate, retail, loans against gold ornaments and do only mandatory credit interventions to the economy-boosters, agriculture and MSMEs.
Banks’ ability to manage adverse selection and moral hazard will depend more on their willingness to cooperate with the government to manage sovereign dues (PF, GST, commercial tax, etc,) of the stressed account holders and their ability to work with NBFCs that have acquired the art of doing the impossible with ease while dealing with the stressed assets. Credit rating tools, balance sheet ratios and rationing credit will not serve any purpose in pandemic times as they have the potential for increasing credit risk rather than diminishing.
The Atma Nirbhar Bharat Scheme 1 that provided for automatic emergency credit loan facility of 20% additional working capital against the National Credit Guarantee Scheme for all standard assets up to Rs 3 lakh crore — though limited the credit risk taking abilities as a response to unexpected failures and prolonged uncertainties — has not yet taken off fully. Only around Rs 4,000 crore of the Rs 1.2 lakh crore has been disbursed!
Expanded balance sheets, through mergers and acquisitions, have been unable to enhance the skills of those working off the counters. The field staff that got used to declaring the ‘tending to fail’ accounts as NPAs and proceed against guarantees or securities with the switch of a button on the computer are not able to understand the new booster credit measures provided through Atma Nirbhar Bharat Abhiyan II – providing subordinate debt (equity) of 15% of the outstanding debt as personal loan to buttress the stressed asset revival.
There is little time for skilling and re-skilling. Therefore, it makes sense for banks to engage accredited institutions of State governments for undertaking the ABC analysis of their stressed accounts and provide succour to MSMEs. They should segmentise all such loans after the declared threshold date March 31, 2018, classifying Special Mention Accounts-2 category (principal or interest payment overdue between 61 and 90 days) and NPAs in various buckets up to the debt limit of Rs 5 crore.
Exceptional circumstances require exceptional solutions. Banks should plan the revival of the industrial sector on priority so that the supply chains do not shrink. District-wise townhall meetings, replacing committee approach with rational information sharing for quick decision hold the key to quick revival of manufacturing. Telangana has the advantage of becoming a front-runner with Telangana Industrial Health Clinic Ltd (TIHCL) which helps banks with such revival plans.
(The author is Economist and Risk Management Specialist)
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