Six months ago, there was a board battle between executives (mainly Governor and Deputy Governors) of the Reserve Bank of India (RBI) and the external board members over lifting of lending restrictions on a dozen weak banks that were under the central bank's prompt corrective action (PCA). The board eventually prevailed and over half a dozen public sector banks were allowed to resume their lending activities. An analysis of the financial results of these weak banks raises questions on their lending practices. These banks could be taking on more risks amid competition to attract good and safe businesses.
The South-based Corporation Bank, for example, has seen a 123 per cent jump in its exposure to non-banking finance companies (NBFCs) in 2018-19. This high growth in NBFC segment is surprising as most banks have either reduced or cut their credit lines completely for this battered sector. The bank's advances, however, grew from Rs 4,696 crore in 2017-18 to Rs 10,474 crore in 2018-19. The share of NBFC exposure to bank's total advances is around 10 per cent. Surprisingly, the retail credit, which is the safest and most advisable when the bank's financials are weak, saw a negative growth of 10 per cent.
Another state-owned Allahabad Bank saw its corporate exposure growing in sectors like infrastructure (roads and ports), cement, gems and jewellery and construction. The retail lending, however, grew by around 15 per cent. While many banks are not growing their project book and focussing on working capital and fee-based income, it is surprising to see PCA banks such as Allahabad Bank expanding their corporate books.
Delhi-based Oriental Bank Of Commerce, yet another weak bank, has rightly grown its retail book by a massive 41 per cent in 2018-19, but the personal loan segment has contributed big time to high growth. The personal loan, which is unsecured in nature, has grown by 38 per cent. Private bankers say weak banks have been grabbing the leftover business in the market.
Another large bank, Bank Of India, which is out of PCA, has seen good growth in its advances in 2018-19. An analysis of its growth shows high contribution from infrastructure, base metals and textiles. All these sectors are stressed. A senior director of Bank Of India defends by saying that the infrastructure loans have been extended to government guaranteed projects. "There is no risk in these projects," he says.
These PCA banks that came out early because of interventions of RBI directors for supporting the MSMEs and other key sectors of the economy have to be very careful in lending to risky sectors. The very fact that they landed in PCA was because of large corporate loans that went bad. In fact, these banks should focus on scaling up retail, especially mortgages, fee-based income and working capital loans.