We nan now bank on our banks

GoI can take credit for the health of banks after a decade-long cleaning up of bad loans. Parallelly, Indian companies have shed their bloated debt and are now primed for capital expansion on signal from consumption demand. Sticky loans at public sector banks (PSBs) are heading for their best performance in 10 years as credit demand is pushed up by households emerging from pandemic restrictions. India’s relatively low household indebtedness cushions its banks against emerging stress in consumer credit. It may be premature to suppose the regulators – RBI and GoI – have won the battle. Bank resilience will be tested in newer ways with resumption of corporate borrowing. They would do well to heed finance minister Nirmala Sitharaman‘s suggestion about building newer strengths.

True, public sector banking is in far better shape now with weak lenders being merged with stronger ones, bigger capital buffers, improved valuation of loans and more avenues for recovery. This is a dramatic turnaround from a situation where bad loans had throttled the banking industry’s ability to lend. Alongside, regulatory arbitrage with shadow banks has been closed following a debt crisis in infrastructure finance. Yet, the remedies are not complete. Privatisation of PSBs has not materialised despite their owner’s stated intent. This last bit is key to improving governance by unshackling banks from government intervention in business decisions, a significant contributor to dodgy lending. The government has used healthier bank balance sheets to direct credit to micro enterprises. Delinquency rates are within tolerance although the nature of lending stretches banking resources.

The big challenge for banks, in India as elsewhere, is having to reprice credit risk as liquidity tightens following the loose monetary policy of the pandemic years. An era of cheap money may have ended for the world economy, with central banks trimming their balance sheets and governments taking an unhurried path to fiscal balance. Indian banks will have to deliver against this backdrop.