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The sustained slowdown in the demand for credit from the banking sector masks another grim reality: the worsening quality of the demand. Credit to the commercial sector from the Indian banks is growing at only 15.7 per cent, year on year, and fresh loans referred to the corporate debt restructuring cell in this financial year have risen to Rs 39,400 crore. This is taking place faster than the rate at which the cell is able to restructure them, which means that the backlog is mounting. In these circumstances, to say that the banking sector is under pressure is to state the obvious. Whether or not conditions will worsen is what investors in the Indian economy would like to know. And the ranks of those investors include everyone who has an account with an Indian bank and keeps money in it. The recent report by Moody's and the scepticism expressed by the RBI's deputy governor K.C. Chakraborty on whether the public sector banks, which account for 70 per cent of the banking sector's turnover, were being transparent in showing the extent of their non-performing assets, are dimensions of the same problem.
The challenge for the Indian banks is to figure out the sectors that could help them recoup their losses. Few exist at this point. An ICRA report on the sector says up to 50 per cent of their exposure to the power sector may need to be restructured. The sector is the largest borrower from the banking sector at roughly 18 per cent of the total credit for industry. The next largest is iron and steel, also in a slump. Together, the two account for a third of banking credit to industry as per RBI data. Since a disproportionately large percentage of these loans was extended by the public sector banks, the concentration of risks becomes more severe. These banks are under-providing for their risks and hoping the economy will revive to back their bets. Providing for the full risk runs the peril of eroding their capital fast. Since the banks are majority-owned by the government, it would mean a larger demand on the finance ministry to recapitalise them.