During the first three months of FY20, funding from foreign sources grew by a massive 77% from a year ago.
During the first three months of FY20, funding from foreign sources grew by a massive 77% from a year ago.

India’s biggest lenders fail to meet even a shrunken funding demand

  • The Reserve Bank of India’s (RBI’s) annual report shows that non-food credit fell by a massive 1.7 trillion in the April-June period
  • Struggling with low capital and a mountain of bad loans, banks have been unwilling to part with money even when the central bank has flushed them with liquidity

If the Indian economy were a fairground, the loneliest stall would be of credit. Indian banks and even non-banking financial companies (NBFCs) were hardly giving out loans in the first three months of FY20.

With the two biggest sources of funds absent, it is no wonder that the flow of funds to the economy shrank by 74% during this period.

The Reserve Bank of India’s (RBI’s) annual report shows that non-food credit fell by a massive 1.7 trillion in the April-June period.

But before we attribute this to a seasonal slack in credit flow, the corresponding quarters in previous years haven’t shown such a marked plunge.

This means that Indian companies found themselves turned away even though fewer came forward to borrow than before.

Struggling with low capital and a mountain of bad loans, banks have been unwilling to part with money even when the central bank has flushed them with liquidity.

Signs are that for the rest of FY20, a sharp pickup in credit growth from domestic lenders is unlikely. Demand for funds is less than before as most companies are unsure of the future. Public sector banks that account for more than half of the credit flow would be busy with mergers. The country’s largest lender State Bank of India doesn’t expect loan growth to be more than 12-15%.


That leaves non-banks and the recovery there is far from encouraging. NBFCs have been besieged by a liquidity crisis after the fiasco at Infrastructure Leasing and Financial Services Ltd for nearly a year now, with the recovery process slow.

Even big NBFCs with balance-sheet muscle reported a slowdown in credit growth for the June quarter. Many lenders are still finding it expensive to get funds.

According to RBI, housing finance companies witnessed a 65% drop in loan offtake in the June quarter.

Recall that NBFCs had picked up slack in credit when banks were unwilling to lend two years back. Banks returned in FY19, while NBFCs have ceded market share. Banks met more than half of the funding needs of the economy in FY19 with 57% share of total fund flow to real sector , far higher than 31% in FY17.

Either way, the overall flow of financial resources to companies grew by a mere 4% in FY19.

So while the two biggest sources of funds couldn’t measure up to the demand in Q1, where did companies find money, if at all they did?

During the first three months of FY20, funding from foreign sources grew by a massive 77% from a year ago. Globally, interest rates have been ultra-low and bond yields have been falling, which makes it easier for Indian companies to borrow.

Offshore borrowings can emerge as a big source of funding but for the economy’s wheels to spin faster, the domestic lenders need to buck up.

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