No hope for early economic revival

India’s growth story that was slowly limping back to normalcy is going to take a severe beating at least in the short term due to the credit-squeeze that the Punjab National Bank fraud would now trigger. Banks, especially the Public Sector Banks (PSBs), are expected to become even more cautious and would now be busier in erecting proper checks and balances to make sure that what happened at PNB does not become the norm. Such caution on the parts of banks would not only squeeze the flow of credit to the industrial sector but would also make the credit expensive, admit many experts. “There is an urgent need for banks to be ultra-cautious as it seems desirable now” warns Dr Jaijit Bhattacharya, President, Centre for Digital Economy Policy Research. He admits that the economy that has long been negotiating with the twin balance sheet problem would find it difficult to raise cheaper capital to fuel its growth. This means that the government’s objective of job creation would also take a major hit. Lower growth and consequent slower job creations would obviously have its impact on general elections to be held early next year.

Many agree that this whole (PNB) episode has dented the goodwill of the Indian banking sector because of which the bond rates in coming times would harden further. But “however huge this episode seems to appear, it is not a big enough episode which could derail India’s growth story,” feels Deepak Kapoor, taxation lawyer at the Supreme Court. He however agrees that the negative sentiment generated by PNB episode would surely impact the economic recovery in the short term (6 months). The quantum of the fraud is still being measured but few believe that it is restricted to only Rs 11,400 crore.

What may further cripple public sector banks’ capacity to lend is the recent RBI circular which obligates banks to initiate insolvency proceedings against every default (of Rs 2,000 crore and above) if no resolution is reached within six months. Experts say that banks taking their cases to National Companies Law Tribunal for resolution would have to keep 50 per cent (of the default amount) provisioning. “Such provisioning would give a fresh hit on the equity capital of the public sector banks thereby leaving them with fewer resources to lend,” says Phani Sekhar, Fund Manager with Karvy Capital. Although RBI’s strict diktat would help in early recognition of bad assets but banks will now report far more non-performing assets (NPAs), which means that “a sustained recovery in the credit and investment cycle will be further delayed,” says a recent report by TS Lombard. Even the government’s massive re-capitalisation plan will not be enough to jumpstart credit growth, and therefore the investment cycle, in the coming months.

The report adds that the Rs 114-billion fraud unearthed at the state-run Punjab National Bank has spooked investors, but served to show why stricter governance at India’s heavily state-dominated banking sector is necessary. “To this end, the central bank’s ‘tough love’ is a necessary policy to help quickly clean up India’s banking sector, and keep it clean.” Data from the Insolvency and Bankruptcy Board of India show that of the 540 corporate entities that had been put under the Insolvency and Bankruptcy Code for resolution since 2016, only 10 had been resolved until December 2017 and banks had to forgo Rs 37 billion of the total Rs 55 billion that were owed to the banks by these 10 borrowers. In other words, banks were able to recover only 32 per cent of the money owed to them.

After remaining persistently negative from October 2016 to October 2017, the credit growth for the industrial sector modestly picked up to about 12 per cent in February 2018 (albeit from the lower base of yesteryears). “However, growth of credit to medium scale industries has remained negative since June 2015,” laments the latest Economic Survey. Small and-medium-enterprises that create highest number of jobs (all across the globe) would continue to suffer for want of credit. MSMEs are already struggling hard to fit into the nitty-gritty’s of the new GST regime. Higher cost of borrowing would thin down their margins further, forcing many to close down.

India’s public sector banks which control about 70 per cent of all the deposits in the country have an alarming NPA ratio — about 15 per cent of their total loans and advances. “Government’s initial silence on the PNB episode has only enhanced the suspicion in people’s mind. Such mishandling has triggered more chaos in the stock market where all public sector banks have taken a hit. As the share prices of all PSBs have come down drastically, many feel that it is a good time to buy public sector bank’s stocks. The fact that the RBI, the regulator of Indian capital market, has been arraigned by the Finance Ministry to explain the regulatory lapses has eroded the institution’s credibility in people’s mind.

Apart from the credit squeeze, there are other factors which are expected to slow down economic revival. Foremost among those is the Long Term Capital Gain (LTCG) tax introduced by the over-ambitious government while keeping the short-term capital gains tax intact. The re-introduction of LTCG has spooked investor’s sentiments which would eventually restrict the flow of foreign money (FIIs) into India’s capital market. “Bringing back LTCG shows the perverted view of the government regarding India’s capital market,” says Kapoor. Oil prices moving up might create a dent in India’s balance of payments as well.