Good banks, bad lenders

For Indian banks, 2009 was a topsy-turvy year. They were flush with liquidity but ironically still reluctant to lend. Indeed credit offtake, for myriad factors, remained sluggish for a large part of the year.

The economic downturn, of course, had a lot to do with the caution demonstrated by banks. Default risk in an uncertain business environment led to a flight of bank capital into perceived safer avenues like mutual funds and government securities. Then, there were other reasons as well. Corporates, too, shied away from bank credit as the slowdown hit home with telling impact.

Many companies — across sectors like steel, cement, auto and auto ancillary — found themselves neck deep in inventories (unsold stocks) which also forced them to cut back on future expansion in capacities. And for the first time, the new growth driver for banks, retail credit, saw signs of wearing off.

WATCH OUT FOR IN 2010

Infrastructure lending to pick up.

Bump-up in corporate credit due to revival of expansion plans.

Retail loans to accelerate, especially mortgages.

Banks to focus on financial inclusion and mobile banking.

The result: RBI lending statistics reveal a massive drop year-on-year with growth in non-food credit plunging to 11.2 per cent (as on October 9, 2009) from 29.4 per cent a year ago. Amidst it all, banks continued to show robust bottom line growth. According to Indian Banking Association (iba), the net profits of 27 leading public sector banks rose from Rs 26,988 crore in March '08 to Rs 34,319 crore in March '09.

The reason: low non-performing assets, higher operating efficiencies and focus on low-cost current account and savings account (casa) deposits to lend in the market.

So, will banks shed their inhibitions in 2010, given the incipient economic recovery? They surely will, say experts. There are already tell-tale signs of both corporate and retail credit picking up, they say. "In the next few quarters, corporate loan growth will probably outpace retail loan growth given the capex cycle and infrastructure loan demand," believes Paresh Sukthankar, Executive Director, hdfc Bank.

Also, all eyes would be on Mint Street to see how the central bank tackles inflation without disturbing the growth momentum. The projected inflation figure of 6.5 per cent by March 2010 could mean that interest rates will be headed north.

The inflation rate had already reached 4.78 per cent in November. But analysts are not unduly perturbed. Edelweiss Securities in a report points out that there would only be a gradual tightening. "We don't expect a knee-jerk reaction from the regulator," it says. Then, there is also surplus liquidity in the system on the back of soaring capital flows which create enough opportunities for banks to lend.