Central Vigilance Commission vigil slows bank credit growth

After the Syndicate Bank bribery case, the Central Vigilance Commission (CVC) has stepped up its vigil over banks. The commission has sent a series of letters to banks on vigilance issues and prevention of fraud, asking them to follow the procedures while sanctioning loans, which has resulted in banks sitting on credit sanctions.

Many banks are seeing negative credit growth as a result of these constant directives from the investigation agency, bankers have told dna.

The credit growth during the first half of 2014-15 -- from April to September -- stood at 1%, much lower than the 4.8% reported during the corresponding period last year. The credit to services sector had a steeper fall of 1.9% according to RBI data.

Head of a public sector bank said, "Constant circulars -- at least six in the last three months warning banks of fraud detection, directing them how to follow the exposure norms and the procedures for credit sanctions -- are playing on the psyche of bankers, preventing them from taking any credit decisions. There is demand for credit from certain quarters of industry, but banks are postponing credit sanctions."

Bankers agree that most of the sectors are over-leveraged and the demand is coming from companies with rather weak balance sheets or with high component of debt. Textiles, steel, cement and real estate are some of the segments that require credit but banks are refraining from taking any decisions.

Another banker said, "The stress is visible in companies which have grown in the boom years from 2000 to 2010. The older companies have stronger balance sheets. But the Supreme Court ruling on the coal blocks is a proof that credit decisions which may be over a decade old may be called to question. Banks and companies will be affected by the coal block cancellations."

According to the estimates by the credit rating company India Ratings & Research, the committed sanction to power projects in the private sector that are impacted by the SC judgement is around Rs 140,000 crore. Of this, the committed exposure of banks is estimated to be around Rs 90,000 crore (accounting for around 1.2% of banking system loans) while the balance would be accounted for by non-banking finance companies (NBFCs) such as Power Finance Corporation and Rural Electrification Corporation.

The large public sector banks (such as State Bank of India, Bank of Baroda, Bank of India, Canara Bank and Punjab National Bank) account for 46% of this exposure compared with 39% for the 10 mid-sized public sector banks in terms of assets. The risk, however, is much higher for the latter group.