Mumbai: Indian banks’ loan growth to fund-starved microcredit and infrastructure sectors has dropped drastically in the first six months of the current fiscal despite attempts by the government and the central bank to push credit flow to these sectors.
The decline in loan growth is the sharpest in microcredit, which includes microfinance institutions (MFIs) and self-help groups (SHGs) and is critical for low-income borrowers in rural areas.
Till September this fiscal, the loan growth to microlenders has declined 16.4% compared with a 7.5% growth in the first half of last fiscal year.
MFIs are firms that give small loans to low-income borrowers while SHGs are a group of six to seven women who mobilize savings and secure bank loans to distribute among the group at a margin. On a year-on-year basis, that is between October 2010 and September 2011, credit growth to the segment declined 4% compared with 27% growth in the previous year, according to latest Reserve Bank of India (RBI) data, released on Monday.
“We are trying to diagnose why MFIs are not getting funds,” said a senior executive at a leading state-run bank, who is heading corporate credit division of the bank.
“It is not that banks are reluctant and do not have liquidity but the fact is no lending is happening,” said the executive, who declined to be named.
MFIs disagree. “The bankers are not able to digest the impact of the crisis. They believe that uncertainty continues in the sector and refrain from lending to us,” Puli Kishore Kumar, managing director and chief executive officer of Trident Microfin Pvt. Ltd, an Andhra Pradesh-based MFI, said. “The authorities need to convince boards of commercial banks about the need to lend to MFIs.”
Loan outstanding to microcredit in September declined to Rs 22,480 crore from Rs 26,895 crore in March, according to RBI.
Banks stopped lending to microlenders after a crisis gripped Andhra Pradesh, the largest market for Indian MFIs in October 2010, when a state law banned microlenders from doing doorstep business and made government approval mandatory for every second loan. Microlenders saw their collection rates falling to 5-10% in the state, in turn, forcing banks to stop fresh lending as they feared defaults on loans.
Bank lending to infrastructure sector, especially to the crisis-ridden power sector, has also seen a sharp decline in the recent past. The bankers attributed delay in completion because of scarcity of fuel, poor financial performance, lack of reforms and resultant stress in the industry to the fall in lending in this segment.
State-run banks have stopped giving fresh loans to money-losing state-owned power utilities after a finance ministry directive that advised public sector banks not to increase their exposure to power utilities, including distribution companies, unless they pare losses and raise tariffs.
According to RBI data, bank loans to the sector grew at a slower pace of 11.7% till September this fiscal compared with a 21.1% growth in the year earlier.
Total power loan outstanding in absolute terms stood at Rs 3 trillion in September from Rs 2.27 trillion last year.
While bank lending to telecommunication companies has also shown a sharp decline, lending to the roads sector showed an increase during the fiscal.
Analysts said rising interest rates is the key reason that has hurt loan growth as economic growth is slowing.
“From banks’ point of view, it doesn’t make sense to lend to sectors like power and infrastructure as they are facing problems and clearly not doing well,” said Hatim Broachwala, analyst with Mumbai-based domestic brokerage Fortune Financial. “More than the interest rates, the real concern is slowing demand, Broachwala said.
RBI has raised its policy rate effectively by 525 basis points since March 2010 to fight inflation in the world’s second fastest growing major economy. One basis point is one-hundredth of a percentage point.
While bank lending to infrastructure and microcredit has slowed down, banks have significantly increased the pace of loan growth to gems and jewellery, vehicles and related equipment and export credit, the RBI data showed.
Growth in loans, so far, this fiscal to gems and jewellery industry stood at 18.7% compared with 7% in same period last year. On a year-on-year basis, till September, bank loans grew at 37.8% to the sector compared with 11.2% growth a year earlier.
Despite slowing money flow to specific sectors, overall loan growth of the banking industry so far has stayed above RBI’s projection of 18% for the full fiscal. Till October, Indian banks have achieved a credit growth of 19.5% on a year-on-year basis.
According to the RBI data, loans to housing, non-banking finance firms and commercial real estate have also shown growth on a year-on-year basis till September but loans against fixed deposits and advances to individuals against share and bonds, have declined sharply.