Why poor credit growth in banks

Most of the top rated banks are enhancing their lending by financing to big corporate houses. Most of the new borrowers added during recession period are belonging to owner groups of medium and large industries and trade houses, and that too in amounts in hundreds of crores per borrower. If number of accounts and amount involved in fresh credit disbursements is asked by all banks month wise for last 12 months, it will become crystal clear how much loan amount has been disbursed during last one year and to how many people. It will also be proved that banks are indulged in simple window dressing or manipulating of figures to show improvement in lending.

As a matter of fact there is steep fall in credit demand in the market. Only those who want to avail loan for consumption, home or education or vehicle for personal use are approaching banks for lending. Government of India has been putting pressure on banks to reduce lending rates. But in the present recessionary market it is not possible to increase genuine lending even if the rate of interest is zero.

Yes those who are bad borrowers, who will invariably default in repayment of loan will manage the branch manager of a PSU bank and avail loan for any false or right purpose by extending some gifts to Branch Manager in cash or in kind. Such bad advances will ultimately contribute in increase in Non Performing Assets , NPA of the bank as have been happening for last so many years under targeted lending programmes of Government.

Besides honest and true branch manager of a bank is very much afraid of making new finance because probability of account turning bad seems more than the account proving to be healthy asset for the bank. The main reason behind such thinking is that there is practically no full proof method or legal effective steps or any intimidating weapon in the almirah of the bank to recover the loan from defaulting borrowers.

Banks have in fact to depend on the mercy of the borrower so far as repayment of the loan is concerned. Government has failed completely in ensuring the effectiveness of its legal recourse of action.

To add fuel to fire our politicians have polluted the repayment culture by announcing one after other waiver of loans and putting pressure on banks for entering into compromise settlements with will full defaulters as if government advises the banks to surrender fully before the borrowers. There is no fear in the mind of borrowers and they repay the loan as per their whims and fancies. Banks have got no control mechanism, other than persuasions and bagging in front of bad borrowers. This is why there has been poor growth in lending in banks whereas on the contrary there has been quantum jump in NPA of the bank

And it is only due to bulk lending to big corporate house, banks are able to reduce the NPA percentage wise compared to gross advances which helps the bank to project rosy picture and attractive balance sheet.

But the million dollar question is how long such window dressing, concealment of bad assets or restructuring of bad loans will help bank in survival. Lastly banks have to fail as their counterparts are failing in USA and other countries.

Obviously government has to provide effective tools to banks so that they can recover the bad loans and make fresh finance without any fear of action from their controlling bosses. Government has to understand that any lending by banks has to be repaid by borrower and those who fail to do so should be treated as criminal and treated according in quickest time. When borrowers are serious in making repayment of loan they avail from banks , bank will surely become liberal in lending and there will be definite and solid growth in bank’s lending

Danendra jain
11th July 2009