India’s outstanding bank loans shrank during the lockdown despite a massive liquidity injection by the central bank to spur credit growth, indicating demand for loans is ebbing as the pandemic leaves a haze of uncertainty about the future.
Total outstanding non-food credit shrank by ₹1.36 trillion, or 1.32%, to ₹101.83 trillion on 8 May from 27 March, data from the Reserve Bank of India (RBI) showed.
The country has been placed under a stringent lockdown since 25 March to limit the spread of covid-19, bringing economic activity to a standstill. While the initial phases witnessed a complete shutdown of businesses, the government has gradually lifted curbs in green and orange zones, areas that have little or no coronavirus cases, and subsequently even in red zones in the fourth phase of the lockdown.
Bankers said that wilting credit growth is also a result of lack of demand for loans and cannot be entirely blamed on banks’ reluctance to lend.
A senior banker at a large public sector said last week that customers do not want to borrow now but only keep their credit lines in place.
“They might need money immediately after the lockdown and want to keep the sanctioned limit in place," he had said.
Finance minister Nirmala Sitharaman’s office tweeted on 12 May that state-run banks have sanctioned ₹5.95 trillion in loans between 1 March and 8 May. RBI data on credit flow is available from 28 February to 8 May and shows incremental credit growth of ₹1.43 trillion between these two dates, reflecting a difference of ₹4.5 trillion between sanctions and disbursals.
To be sure, RBI data is on outstanding credit (net of repayments), but since most banks have said that around half of their borrowers have opted for the three-month moratorium, repayments are unlikely to have surpassed fresh disbursements.
That apart, while the government data on sanctions is only for state-run banks, the RBI data is for all commercial banks.
Rating agency Icra said on 5 May that the incremental credit flow from banks stood at ₹5.9 trillion in FY2020, compared with ₹11.9 trillion during the previous fiscal as slowing economic growth curtailed demand for credit and banks became more risk averse.
There are expectations of increase in incremental credit flow during FY21, driven by increased credit demand amid weakening cash flows of borrowers because of covid-19 induced stress, said Karthik Srinivasan, group head (financial sector ratings) at Icra.
Meanwhile, the government recently announced measures for small businesses and non-bank financiers, which include ₹3 trillion in guaranteed loans.
Experts said that while banks have not been keen to lend to these high-risk sectors, the government guarantee could be a push in the right direction.
A 14 May note by IFA Global Research Academy pointed out that the measures are intended at getting the flow of credit to resume in the banking system.
Lenders have so far been stashing significant sums of money with the Reserve Bank of India, sometimes even more than ₹8 trillion, on a daily basis.
Banks would therefore rather earn a paltry interest of 3.75% than lend to businesses and consumers.
Lenders parked ₹7.46 trillion with the central bank on 20 May. This, however, has been gradually declining from ₹8.13 trillion as on 13 May to ₹7.6 trillion as on 18 May.
“The banking system has witnessed considerable increase in liquidity following the RBI measures of the last two-three months. This, however, has not led to a commensurate increase in credit offtake from banks," Care Ratings said in a report on 20 May.