India’s risk-averse lenders are emerging as one of the biggest hurdles to the speed of the nation’s recovery from the pandemic-induced downturn, as they hold back credit when the economy needs it the most.
Loans to companies and individuals has been growing at a subdued 5.5%-6% in recent months, which is half the pace seen before the pandemic struck, Reserve Bank of India data shows. The nation’s biggest lender State Bank of India wants to nearly double its credit growth rate to 10% in the year started April 1, but is willing to miss the goal.
“It is a very fragile situation,” Dinesh Khara, chairman of SBI, said after reporting earnings for the fiscal year ended March. The bank would not “compromise” on asset quality to achieve targets, he said. “Credit is a necessary and probably most important ingredient for economic growth,” according to S. S. Mundra, a former deputy governor of RBI, who estimated that the multiplier effect of credit on nominal gross domestic product growth is 1.6 times.
Khara’s comments underline the biggest obstacle to both credit off-take and economic growth, pegged at 9.5% this year, already reduced from the central bank’s previous forecast of 10.5% and following an unprecedented contraction last year. Banks’ risk aversion – or the fear of soured loans jumping in a tough economic environment – could slow the economy’s recovery further, according to analysts, including those at the RBI.
It doesn’t help India’s case that it’s already home to one of the biggest piles of soured loans among major economies. And add to that a crisis in the shadow banking sector, which culminated in the rescue of two lenders and bankruptcy of two more over the past couple of years.
Consumers too are repairing their finances, which bodes ill for overall demand for goods and services as well as retail loans, and in turn economic growth. The current recovery is likely to be less steep than the bounce that unfolded in late 2020 and early 2021, according to analysts at S&P Global Ratings. “Households are running down savings,” the S&P analysts wrote. “A desire to rebuild their cash holding may delay spending even as the economy reopens.” And while Covid-19 relief measures may provide banks some reprieve, the need to raise capital will remain high once virus related stress start to emerge on their balance sheets.