Burnt by the large bad loan pile-up in the corporate segment after the lending boom of 2004-2008, Indian banks turned aggressively to retail loans to lower risks over the last few years.
Every bank, big and small, touted retail as the “growth engine”, prompting a central banker to remark, “Whatever has happened in the corporate financial world in the past couple of years, probably now everyone is moving towards retail lending. But retail banking cannot be a panacea for credit growth.” That was 2015.
Cut to 2020-2021, and the pandemic has turned this bet on its head. The disruption in lives and livelihoods has had a deep impact on the loan repayment capability of small borrowers. And this is very clearly visible from the earnings reported by major banks so far.
From ICICI Bank, Union Bank of India HDFC Bank, Axis Bank, Yes Bank to LIC Housing Finance and Mahindra Financial Services, there’s hardly a lender who has not been bruised.
ICICI Bank recently reported Rs 7,231 crore of fresh bad loans for the first quarter. Of this, Rs 6,773 crore was from retail and business banking. Axis Bank narrated a similar story. Eighty-four percent of bad loans during the quarter came from retail loans. Union Bank of India had Rs 7,049 crore of new bad loans to report for the quarter, the bulk of which was from retail and business loans.
Mahindra Finance, which lends in the auto, tractor, car, CV segments across rural and semi-urban regions, saw gross non-performing assets (NPAs) shot up 15.46 percent in June 2021 from 9.19 percent a year ago. Yes Bank said its retail NPAs jumped by 40 basis points in a quarter to 3.3 percent of the portfolio, while the overall gross NPA ratio stood at 15.6 percent. You get the idea.
God forbid if we see a third wave or if the situation prolongs, the aggressive retail lending bet may turn into an even bigger worry.
While the pandemic rages on, another storm is brewing in the financial world. Lakhs and lakhs of businesses, small and large, are facing disruptions as they suddenly find their current accounts frozen or closed down by banks.
It’s not exactly sudden. Banks were given almost a year to comply with RBI’s new current account rules (we’ll get to those in just a bit), including an extension granted earlier this year. Banks also gave notice to the impacted customers, but alas, like all other work that only gets done when the deadline nears, this too was done in a hectic frenzy over the past few days, leaving many customers confused, helpless.
Back to the RBI rules. The central bank simply said that borrowers should route payments to and from current accounts maintained with banks that have the highest loan exposure to them. RBI does not want Mr X to have a loan account with Bank of Apples, and maintain a current account for all his receivables and transactions with Bank of Oranges. This way, Bank of Apples has no clear picture of what Mr X’s cash flows are, and RBI believes, this is one of the key reasons for frauds, fund diversion, and NPAs in the system. Hence, the new rules in August 2020 that said (1) banks simply cannot open a current account for any borrower who has an existing cash credit or overdraft (CC/OD) facility, (2) banks can open current accounts for borrowers with no existing CC or OD facilities, provided they have overall system exposure of under Rs 5 crore. Above Rs 5 crore upto Rs 50 crores, only lending banks can open current accounts. Non-lending banks cannot, (3) for borrowers with total loans of over Rs 50 crore from the banking system, only such a bank that has a minimum 10 percent of the exposure can open the borrower’s current account.
Now there are several reasons why borrowers want to have current accounts in banks where they may not have a loan account. It could be that they have had a current account with a particular bank for a long time and want to keep it there, or that a bank offers better cash management facilities and the latest tech so more convenience, or simply because they don’t want their lender bank to be able to directly access their cash. Either way, with the deadline to comply with these rules ending on July 31, banks had no option but to close such current accounts or face action from RBI.
Many aggrieved customers have taken to social media to express their anguish, finding their accounts frozen or closed overnight. These are mostly small businesses who can’t receive or make payments from their accounts anymore until their accounts are reconciled, transferred to a nodal bank etc.
One can barely blame the regulator for trying to clean up the system, put rules in place to ensure better monitoring of funds. Banks have dragged their feet for months hoping for another deadline extension, and the customers are now in a soup.