MUMBAI : The Indian economy continues to face a credit crunch as loan growth slowed to a low of 6% in the second quarter, which was last seen during demonetization, foreign brokerage firm Credit Suisse said on Monday.

Analysing the second quarter numbers, the Credit Suisse report said non-banking financial companies (NBFCs) witnessed a 36% drop in disbursements, while growth in bank lending slowed to 8% at the end of September.

Credit Suisse said the slowdown in bank credit was driven by both public and private sector banks. PSU banks saw growth fall from 8% to 5% year-on-year, while private sector bank growth was down from 22% to 14%. Growth for NBFCs and housing finance companies (HFCs) also slowed from 24% a year ago to 7%. With this, overall loan growth fell y-o-y from over 11% to 6%.

While loan growth slowed, banks’ performance improved during this quarter. According to the report, PSU banks reported lower loss y-o-y on account of healthy net interest income growth and improved margins.

Credit costs, however, remained high even with moderation in slippages, as recoveries remained delayed under the Insolvency and Bankruptcy Code (IBC).

Private sector banks saw stable operational performance with healthy net interest income (NII) growth of 18% y-o-y.

Net profit was, however, down 3%, as the value of future relief through deferred tax assets (DTA) is expected to fall because of the corporate tax rate cut.

Interestingly, the report highlighted that bank lending to the ailing NBFC sector increased 30% y-o-y, even as mutual funds (MFs) pulled back lending to this sector.

Bank exposure to NBFCs, therefore, increased to 8.5% of total advances, as compared to 7% a year ago.

“With most PSU banks’ NBFC exposure now at 10-15% of their loan book, headroom for incremental funding is low," the report added.

NBFCs, however, continued to face funding constraints with MFs cutting their exposure to the sector by 30%, and long-term funding available only to a select few companies. According to Credit Suisse, October saw a sharp reduction in bond issuances, down 40% y-o-y.

Over the past year, funding mix of NBFCs have seen a change, with the share of commercial paper funding down from 11% a year ago to 5%, and bonds down from 50% to 47%.

Besides, NBFCs sold down loans to meet their funding needs in the second quarter. The report said the appetite for securitized paper is likely to be selective, going forward, as investors turn wary about the credit quality of the NBFCs, given the recent defaults on mortgage pools originated and securitized by Dewan Housing Finance Corp. Ltd.

According to the report, asset quality for banks moderated in the second quarter, led by moderation in non-corporate slippages, particularly in agri and SME, which had spiked in the first quarter. The quarter saw a dip in corporate NPAs, while retail NPAs remained stable.

For NBFCs, as well, retail asset quality held up, while wholesale NPAs saw some increase.