Loan growth continued to be tepid as corporate India refused to take investment calls and the growth of deposits in the world’s fastest growing large economy was just 9.1%, a 53-year low. Bank deposits had last grown at lower than this rate in 1963, the year former Reserve Bank of India (RBI) governor Raghuram Rajan was born and India was recovering from a war with China.
However, there was no respite from the growth in bad loans in 2016. A couple of bank chiefs claimed they had cleaned up their balance sheets by making adequate provisions for bad loans at the cost of posting mammoth losses in the first half of the year, but those claims were made in a hurry. The pile of bad loans continued to grow, although the pace of growth slowed in the September quarter.
Amid all these, former governor Rajan’s decision not to seek another term in office after his three-year term ended in September created much furore in the financial sector, in India and overseas. But even this and the two global events which roiled the financial markets—the British exit from the European Union, popularly known as Brexit, and Donald Trump winning the US presidency—were not enough. November saw a black swan: India went for replacing existing Rs1,000 and Rs500 currency notes, roughly 86% of the total currency in circulation at that time and equivalent to a little more than 10% of the country’s gross domestic product.
What started as a concerted movement by the government and the banking regulator to fight black money, fake currency and terror financing, took a sharp turn midway and converted itself into an aggressive push for a digital economy where every transaction leaves an audit trail behind. The long-forgotten branch banking was revived and millions of people were seen queuing up at bank branches and ATMs to exchange old notes for new, encouraged by Prime Minister Narendra Modi’s call to fight black money and believing that this could be the last queue to end all queues.
Against this backdrop, what would be the dominant themes of 2017? Here are six of them:
1. The banking landscape will change forever with one-and-a-half-dozen new entrants. In 2015, we had seen the birth of two new universal banks after a gap of 12 years. In the first few months of 2017, there will be 10 small finance banks and eight payments banks joining the fray. To put this in context, since Independence and till 2014, in 67 years, 12 new banks were born, but not all of them managed to survive. The new entrants will intensify competition, particularly in the hinterland of India with new products and higher rates to woo depositors and lower rates to sell loans. One payments bank which started a pilot project in south India is offering 7.25% interest on savings accounts (against 4% offered by most banks) and free talk time—a minute per every rupee kept in the bank.
2. Meanwhile, the State Bank of India, the nation’s largest lender, will catapult itself into the big league of the world’s top 50 banks by assets in 2017 by merging its five associate banks with itself. The combined entity’s balance sheet will be at least Rs37 trillion—five times that of ICICI Bank Ltd In 2015, SBI ranked 52nd in the world by assets, according to Bloomberg. Following the merger, everything remaining the same, it would be ranked 45th. A larger balance sheet will enhance its risk-taking ability and expand its bandwidth to give loans. Its success may also encourage the government to tread on the path of consolidation for other state-owned banks, although the context is different.
3. Is the nightmare of bad loans behind us? We will get to know in 2017. Between August and December 2015, the RBI had inspected the loan portfolios of all banks and asked them to clean up their balance sheets by March 2017. In absolute terms, the gross non-performing assets or NPAs of the listed banks sequentially or on a quarter-on-quarter rose 6.44% in the September 2016 quarter, lower than 8.87% in the June quarter, and around a 32% rise over both the March and December 2015 quarters. Clearly, it has been coming down. After provisions, the rise in net NPAs in the September quarter was 4.81%, half of what we had seen in the June quarter (9.13%) and much lower than the 34.62% rise in March and 33.65% rise in December. If the trend continues, we will see a better picture in 2017, but all of them will not be back in the pink of health.
4. India’s Rs65,000 crore microfinance industry will change its ways of working in 2017, in the aftermath of the ban on high-value notes. Around 85% of the loan disbursements by the microfinance institutions (MFIs) and close to 95% repayment or collection of loans have traditionally been in cash. To survive and flourish, the MFIs will forge alliances with different kinds of banks—small finance, payments and universal banks—as well as digital wallet service providers and disburse and collect money through the banking channel. This new architecture will make loans expensive for the MFI borrowers as the money cannot be disbursed at their doorsteps anymore. They would need to travel to the nearest bank branch or the business correspondent and, in the process, they may lose half-a-day’s wage and/or incur costs in transport. On the other hand, the operational cost for the MFIs will come down as they would not need so many people for the disbursements of loans and collection of repayments. This will help them bring down the price of loans and compensate for the additional cost that the borrowers will incur.
5. Not the MFIs alone, all non-banking financial companies (NBFCs) will have to change their business model following the clampdown on cash. In the past couple of years, this sector had been growing at a fast pace, but now things will change. Many of their customers are not in the income tax bracket and they earn their salary and wages in cash. Till now, while assessing their repayment capacity, these firms were taking into account the customers’ official income as well as the surrogate income in cash, but now they would need to change the risk assessment process. And, the most sought-after product, loan against property or LAP, may also face a tough time. While home loans are the safest bet for the bankers as they are backed by securities, LAP, the equivalent of home-equity loans internationally, could be more than 50% of the total mortgage book of many NBFCs. Small and medium entrepreneurs are big buyers of LAP and as their transactions are mostly in cash; they are being hit the hardest. The NBFCs would need to look for newer products to grow.
6. Finally, will we see banks’ loan portfolios growing in 2017? That’s anybody’s guess. Till the first week of December, the credit growth has been a meagre 5.8%, year on year. Typically, bank credit should grow at two-and-a-half to three times the country’s GDP, but that has not been the case in the past few years as the investment climate remained anaemic and many large corporate houses remained over-leveraged. If the so-called demonetisation move succeeds and the much-awaited goods and services tax comes in place, the combination may change the sentiment. Armed with the insolvency law, the banking system may also be willing to take risks and lend. Inflation is expected to remain within the RBI projection and we may see at least one round of rate cut in February after the budget. Relatively easy liquidity and low interest rates could revive the loan market in 2017.
The mother of all trends in 2017 will, of course, be the relentless push by the government for a cashless economy and its implementation by the banking system. We would need to wait and watch how it unfolds.