April-December bank credit growth the lowest on record

Mumbai: Demand for bank loans in the first nine months of this fiscal has fallen to its lowest since at least 1998, shows data from Reserve Bank of India (RBI). Data prior to 1998 was not available.

Credit growth so far this fiscal (between 1 April and 12 December) has slowed to just 2.68%, according to the data. For the fortnight ended 12 December, bank credit has increased to ₹ 63.03 trillion from ₹ 61.39 trillion at the end of March, data from RBI’s website shows.

Bankers and analysts blame this slow growth on multiple factors, starting from the lack of corporate investment to the recent fall in market rates, which has allowed corporates to shift borrowings away from costlier bank loans and tap alternative sources of funding. Lower working capital demand from state-owned oil companies due to the recent fall in oil prices has also played a part in the lower demand for credit.

“There have been no major investments and no major large projects in sectors like infrastructure, roads and mining, which has led to a chain reaction in sectors like commercial vehicles. There have been some projects which have been approved but there has been no draw-down of credit,” said Abraham Chacko, executive director at Federal Bank Ltd.

In its monetary policy review on 30 September, RBI acknowledged that credit growth had ‘decelerated’ despite liquidity conditions remaining comfortable and deposit growth remaining normal. “Partly, this sharp deceleration is on account of a high base—monetary tightening to curb the exchange market pressures in July-September last year raised interest rates on alternative sources of funds and pushed up the demand for credit from the banking system,” RBI had said.

This year, market conditions are different and corporations are choosing to borrow via instruments like commercial paper rather than go in for bank loans. In its policy review on 2 December, the central bank had added that slow bank credit growth also reflects an increasing reliance of large corporations on commercial paper and domestic as well as external public issuances.

Analysts, however, say that the underlying factor behind weak credit growth remains the inability and unwillingness of corporates to make fresh investments.

“Some of the industries are in distress and are not sure how long this uncertainty will last. Growth has taken a beating and so companies which normally would borrow for their working capital requirements are also delaying their borrowings, which has impacted credit growth,” said Abizer Diwanji, partner, head of financial services at consulting firm EY, adding that besides slow demand from loans from manufacturing companies, there has also been a drop in loans for working capital requirements of companies.

Banks have also become more selective about who they want to lend to, said other analysts. Non-performing assets (NPAs) across a number of banks remain elevated, restricting the ability of banks to lend to borrowers perceived as risky. Gross NPAs at 40 listed banks grew 17.5% to ₹ 2.69 trillion in the quarter ended September from ₹ 2.29 trillion a year ago. Banks have also restructured a cumulative ₹ 3.67 trillion of loans until 30 September, data available on the corporate debt restructuring website show.

“There have been a chain of events, especially the sharp rise in bank NPAs, which have made banks wary of NPAs, which has contributed to the low credit growth this year,” said S. Ranganathan, head of research at LKP Securities Ltd.

The continued weakness in credit growth has left banks flush with cash, allowing them to reduce deposit rates. Banks have cut deposit rates by between 25 and 50 basis points since the start of December, due to the easier liquidity conditions and the expectation that RBI will cut its benchmark policy rates in early 2015 due to falling inflation. Consumer inflation in India has fallen to 4.38% in November from a peak of 11.16% a year earlier, mainly as food and fuel prices dropped. One basis point is 0.01 percentage point.

Most banks, though, have stayed away from cutting lending rate so far. State Bank of India chief Arundhati Bhattacharya said on 9 December that banks will find it easier to cut lending rate if there is some pickup in credit growth.

“A clear indication has been the muted toplines of companies, which means that they do not need money to expand. For banks, it has meant that they have been flush with funds with not enough avenues to park them, which has resulted in the latest round of interest rate cuts despite the RBI not cutting rates yet,” said Daljeet Singh Kohli, head of research at IndiaNivesh Securities Pvt. Ltd.

With new projects still seen some time away, bankers and analysts expect the weak demand for loans to continue.

In a conference call with reporters after its September quarter results, ICICI Bank Ltd managing director and chief executive officer Chanda Kochhar said demand for loans from firms will take at least “a couple of quarters” more to come through.

“There is a lag between economic recovery and growth in corporate demand. First, corporate production will go up, which will lead to demand for working capital loans and, as company cash flows improve, there will be a revival in investments, which will lead to a pickup in loan demand,” Kochhar had said.

Chacko from Federal Bank is also not very hopeful of improved demand for loans.

“Only when the issues around mines and land acquisitions have been sorted will there be some revival. Already we are seeing some revival in the auto sector and since the revival has not yet happened so far, we can only expect it in the next financial year post the budget,” Chacko said, adding that till demand for loans from companies revives, retail loans for housing, auto and even small enterprises will have to make up.

Ashwin Ramarathinam contributed to this story.