Now, if credit card delinquency spells trouble, there may be questions with regard to the much bigger retail sub-categories of car and housing loans. India has only 57 million credit cards
(debit cards are many multiples of that), and are mostly held by people in the top 10 per cent of households. If delinquency rates soar in this category, it speaks of financial stress in even the relatively privileged homes whose people have (or had) jobs in the formal sector, or who run small businesses that may or may not be in trouble. The full picture will become clear as more data emerges.
As it happens, the government-owned banks had just begun to see light at the end of a dark, five-year-long tunnel. The massive write-offs that began in 2015-16 had begun to taper off by 2019-20, though the majority of these banks were still in the red. The government in turn had probably hoped that its annual cash infusion to bolster the capital of these banks (a treasury-emptying Rs 2.66 trillion in the three years to 2019-20) was coming to an end — specially with some of the weaker banks being merged with stronger ones. Still, given their poor levels of recovery on written-off loans, government banks have not done anywhere near enough provisioning. The shortfall, when made up, will put stress on capital adequacy. In addition, if Covid-19 causes fresh havoc to government-bank finances, it could be back to the old story of large-scale losses prompting further capital infusion.
We won’t know for a while how good or bad the story is going to be, which is why the development with SBI Cards
is still only a canary, i.e. an early warning. The moratorium on loans till August, followed by permission for a fresh but selective restructuring of loans, is based on sound logic in that special circumstances require exceptions to the usual rules. Businesses that are otherwise sound should be given breathing space to get back on their feet. But such steps also delay the full discovery of credit quality. Especially with the Supreme Court getting into the act on what interest banks can or cannot charge, and uncertainty about whether the government will pay the forgone interest to the banks, we are in uncharted territory. A year from now, it may look like the dark financial tunnel has got longer.
The government now talks more openly than before of outright privatisation of some of its smaller banks. Ironically, the repeated rounds of capital infusion
have meant that government ownership in these banks has increased proportionately. Yet sale will have to be at poor valuations, since all of them quote at significant discounts to book value. Questions could be asked even 20 years later, as Arun Shourie has discovered about that Udaipur hotel.