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Home / Markets / Mark To Market /  Chart of the day: Loans or bonds, India’s banks are going slow on all hues of lending

Chart of the day: Loans or bonds, India’s banks are going slow on all hues of lending

While the growth rate in bond issuances has more than halved, as far as short-term commercial papers go, banks have not been investing at all. (REUTERS)Premium
While the growth rate in bond issuances has more than halved, as far as short-term commercial papers go, banks have not been investing at all. (REUTERS)

  • While the growth rate in bond issuances has more than halved, as far as short-term commercial papers go, banks have not been investing at all
  • Analysts believe that a revival in loan growth is likely in the second half of the current year, although initial signs are not encouraging

Frauds, errant borrowers, stretched recovery processes and stubborn promoters have shaken Indian banks’ confidence in lending to the commercial sector. No wonder bank loan growth has decelerated sharply over the past six months.

What should also worry us is the drop in banks’ non-SLR (statutory liquidly ratio) investments. Non-SLR investments are the commercial papers, bonds, debentures and shares that banks buy from companies.

Graphic by Satish Kumar/Mint
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Graphic by Satish Kumar/Mint

In the past, companies have found it cheaper to issue bonds and short-term commercial papers to banks instead of taking loans. This changed after the collapse of Infrastructure Leasing and Financial Services Ltd (IL&FS).

Non-SLR investments by banks grew by a modest 5.5% as of end September, sharply dropping from the 25.3% growth a year earlier.

To be sure, bond issuances and the short-term commercial paper market are dominated by non-banking financial companies (NBFCs) and the drop in growth corroborates the credit crunch NBFCs are facing. After all, with credit ratings under scanner and several NBFCs in great stress, banks would want to be cautious in the near term. Even after a year from the collapse of IL&FS, the situation for NBFCs has only worsened.

While the growth rate in bond issuances has more than halved, as far as short-term commercial papers go, banks have not been investing at all.

Credit spreads have widened and investors including banks are asking companies to pay higher yields on bonds to compensate for the increase in risk perception. This is on top of the more than 9 trillion worth of bad loan stock pile that has made banks tighten their risk assessments.

Analysts believe that a revival in loan growth is likely in the second half of the current year, although initial signs are not encouraging. The non-food credit growth continued to be around 8% even in the first week of November, according to data from the Reserve Bank of India, down from 15.3% a year earlier.

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