Private sector investments in project, or capital expenditure (capex), are expected to take some more time to pick up but government’s policy initiatives and corporate deleveraging measures will improve credit offtake in the banking system, a top banker said.
“While we are seeing some investments in sectors such as roads, ports, renewables and fertilizers, it will take some more time for private sector capex to pick up,” State Bank of India (SBI) managing director
B Sriram said.
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Bank credit to the industrial sector, which continued at an elevated rate of over 20 per cent on an average until four years ago and was in double digits until the month of July 2014, has slipped into the negative in August 2016 — the first time it has done so in at least a decade. For the month of August 2016, the loan outstanding of commercial banks to the industrial sector contracted by 0.2 per cent.
Will capex improve in the near future? “There are two things happening. One is the government initiatives on policy reforms. That’s making the environment much easier for corporates to take decisions. That will enable pick up in investment climate over a period of time. We are already witnessing the benefits of that in a few sectors,” Sriram said in a conversation with The Indian Express.
“The second is that some of the corporates are highly leveraged. They will have to go through a process of deleveraging by selling some businesses. Also maybe divest non-core assets and then look for investments in areas they would like to grow,” Sriram said. That’s a process which has started but is a continuous process. Essar had sold Essar Oil and Vadinar port to Rosneft of Russia to cut down debt.
New policy initiatives will also lead to improvement in capex. “There has been a lot of thrust which has been given to manufacturing through Make in India programmes and in certain sectors like railways and defence. Along with that some of the small and medium enterprises will be able to get some ancillary business on the manufacturing side,” Sriram said.
According to Sriram, overall, corporate loan book growth has been slow. Better rated corporates are also directly accessing the markets. “It may take a few more quarters for us to get the loan growth going. A project pipeline has also slowly started to build up,” he said.
Does SBI see the situation improving? “The uptrend and greenshoots are clearly visible. A GDP growth rate of 7.5 per cent is extremely good in the context of the global scenario. It’s the highest among the countries of similar size. We are looking at an 8 per cent mark in the near future,” he said.
On banks’ reluctance to slash interest rates, Sriram said, “marginal cost of lending rates (MCLR) is based on the incremental cost of deposits and cost of funds. That’s transmitted through the system. If you see the liabilities portfolio of banks, deposits constitute a large part of it and about 5-10 per cent are through borrowings, the numbers being bank-specific. Also, for SBI, almost 43 per cent of deposits are rate agnostic being Current and Savings account balances. The lacunae in the earlier system was that, after the rate cut, immediate transmission was not there. It would now be done in some form or the other… though at times the transmission could be as low as 5 basis points.”
“Every month in ALCO (asset liability committee) we look at the trending of the cost of deposits and funds, the impact of incremental cost is directly passed through in the next month. To that extent it’s completely system-based and data-based. And to that extent, the customer gains on an ongoing basis… instead of going for a rate cut once in three to six months or so,” Sriram said.
On non-performing assets, he said, “we have put out a watch list of some accounts that we are monitoring. About Rs 32,000 crore of accounts are in the watch list that could potentially slip. We are monitoring them closely and expect the figure to be broadly around that level… on the expected lines.”
According to Sriram, the question is not of slippage. “It’s how fast we are able to resolve some of these NPAs. A number of our large accounts need to be resolved in some way expeditiously and we are working hard on it,” he said.
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