Banks turn wary post IBC, tighten lending norms for labour-intensive units

Banks are tightening lending norms for some of the labour-intensive sectors, particularly those that are at the lower end of mechanisation.

The scenario has become even more challenging post-IBC as banks have turned more cautious. Data from the Reserve bank of India (RBI) shows a sharp fall in growth of outstanding loan for sectors like tea, textiles, glass and gems & jewellery.

For tea, the year-on-year growth in outstanding loan has fallen from 32 per cent in 2017 to three per cent in 2019; textiles (including jute) has gone into negative territory, from 7.6 per cent to minus 5.4 per cent in 2019, as has gems and jewellery, from 0.7 per cent to minus 11.1 per cent.

With most companies also under-performing in these sectors, it has become a bit of a vicious cycle.

A tea company owner saod it's a complete disaster. "Banks are just not lending. But then, except for a handful of companies, most were under severe stress from stagnating prices and escalating cost," he pointed out. "Between Assam and North Bengal, there are scores of gardens up for sale, but hardly any buyers."

For jute, many banks are now seeking original deeds in the names of the owners, which is a difficult proposition, given that jute mills have changed hands several times over the years and few owners have original deeds.

“Most jute mill land is still in the name of old companies established in the 1950s and has changed hands many times. Banks are refusing to accept registered documents and want the company running the mills to have clear title," said Sanjay Kajaria, former chairman of Indian Jute Mills Association and a jute mill owner.

"The government of West Bengal needs to allow approval and clearance for regularisation of land title so that the jute mills can mortgage these land for securing working capital loans from banks and financial institutions,” Kajaria said.

Bachhraj Bamalwa, partner in Nemichand Bamalwa, said that banks have been reluctant to extend credit to the gems and jewellery sector for quite some time, identifying it as a high risk sector post-Nirav Modi scam. The proprietor of a leather processing unit too said that banks have been slow in lending to the sector for quite sometime.

Bankers have their reasons. "Typically, these are labour-intensive companies with low mechanisation and financially weak. They are not meeting lending norms," said the head oa public sector banks.

"Most players in the sectors are again proprietorship or partnership firms. Banks are more comfortable dealing with corporate entities," he added.

Another head of a public sector bank said, “Overall there is a slowdown, and no new promoters are coming in sectors like tea, textiles etc. The industry is complaining that the labour laws are not conducive for growth, and we are losing market share to countries like Bangladesh in sectors like textiles. Also, in a sector like tea, when one big company faces problem, it is indicative of the fact, that the whole industry is under stress.”

“There is not much demand in sectors which earlier accounted for major credit. However, banks are not at all shying away from lending,” said another banker with a public sector bank.