Nim Bullies Bank’s Kismet

The lockdown phase hit the credit growth of banks abysmally with figure of a decadal low of 6.14 in 2019-20 fiscal. Here a slip in net interest margin (NIM) will render more pains to bank’s portfolio which is already in shock for long. During the lockdown time RBI in its monetary policy has chewed over policy rate cut so as to rejuvenate banks spasm on ground of deposit liabilities and fall in credit offtake. In the unlock phase the economy has started to gain ground bit slowly. But the concern of right demand boost is knocking firm’s dashboard hard.

Apart from all these hiccups in domestic front the ongoing conflict with China leapfrogs the crisis in many dimensions. The post-covid new normal is descending with a heavy depression over the manufacturing ground and count heavily on banking business. Banking is highly detrimental to economic growth apart from all other instruments. We have seen how the Indian banking sector showed resilience during the financial crisis in 2008. The prominence of public sector banks during that time has helped policy makers a lot to reap the best benefit as it facilitated the RBI on government’s behalf to exercise policies like high CRR, stringent credit policy and regulations of lending rates.

Pix by Amit K Sikder

Merger of Banks: Among the number of concerns taken in pursuit by policy planners to go for banks mergers most important was to curtail down the volume of bad loans in bank’s books. But the move did not count well in arresting the problems due to inapt judicial system and banks reluctance to write off bad loans as that require big losses. And altogether the merger initiatives have failed to arrest this structural bottleneck. Merger is not an option to unleash the burden of government’s development goals which over the years exerted pressure on PSU banks to extend loans which always did not make business at all.

IBC in Covid Air: IBC was mainly intended to bite the pile of bad assets of banks. Basically the Insolvency and Bankruptcy Code (IBC) became a law in 2016 and still existent in system. As of December 31, 190 companies was listed in the default code with a claims of Rs 3.52 trillion had been filed by creditors of which around 43.1% of claims has been recovered. But during 2015-16 fiscal only 10.3% of loans was recovered and it has established a genuine support in favour of effectiveness of the move. Now to alleviate the ruthless impact of Covid-19 the government has brought about some ramifications in terms of raising threshold limit for invoking insolvency to Rs 1 crore from the existing Rs 1 lakh to extend a comfort to mainly MSMEs which hit hard. This apart the government also have it in mind to rule out covid-19 related debt from the default category.

      Bearing all these in mind and expected slackening of credit growth banks have started to lower interest rates and eased requirements for retail customers in different format. So the relaxed IBC may bring forth the concern of surge in NIM figure of banks and could push the sector to a new low. It’s a grave concern for the economy and the government to streamline the ‘Atmanirbhar’ quotient in right direction. Here my simple suggestion goes for a bigger resolution in favour of more infusion of capital to banks which only could keep the hope of the economy alive.

(Ref: IBC impact mentioned here based on Mint study)