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Business News/ News / India/  Borrowers avoid fresh debt even as govt pushes stimulus through bank loans
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Borrowers avoid fresh debt even as govt pushes stimulus through bank loans

A comparison between the loan sanction data from finance ministry and the actual credit flow data from RBI point to a divergence of over ₹4 trillion

Finance minister Nirmala Sitharaman's office tweeted on 12 May that public sector banks have sanctioned ₹5.95 trillion in loans between 1 March and 8 May. (Since the IL&FS defaults, it can be noted that NBFCs and housing finance companies (HFCs) were facing a crisis of confidence, sending call money rates higher and overall liquidity tight.)Premium
Finance minister Nirmala Sitharaman's office tweeted on 12 May that public sector banks have sanctioned 5.95 trillion in loans between 1 March and 8 May. (Since the IL&FS defaults, it can be noted that NBFCs and housing finance companies (HFCs) were facing a crisis of confidence, sending call money rates higher and overall liquidity tight.)

MUMBAI: Even as the government’s stimulus relies heavily on flow of credit to sections of the economy, borrowers do not seem to be in the mood for more loans at the moment, bankers and experts pointed out.

They said while banks have been sanctioning loans, customers are not utilising their limits, awaiting the lifting of the lockdown and the restarting of economic activities. A comparison between the loan sanction data from the finance ministry and the actual credit flow data from the Reserve Bank of India (RBI) point to a divergence of over 4 trillion.

Bankers sanction loan limits to borrowers based on a number of factors, including credit history and balance-sheet strength. This remains on paper till borrowers actually start drawing down real credit form the limit and banks begin disbursing the amount as credit.

Finance minister Nirmala Sitharaman's office tweeted on 12 May that public sector 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 24 April and shows incremental credit growth of 1.77 trillion between these two dates.

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 for only public sector banks, RBI data is for all scheduled commercial banks.

According to Madan Sabnavis, chief economist, Care Ratings, in working capital loans, banks sanction a limit up to which one can borrow and the sanctions are typically 1.5 times the actual disbursements. However, in the current scenario, borrowers do not want a debt pile-up in the absence of real cash flows and would rather wait for some clarity on the lifting of the ongoing lockdown, he said.

“The thing is that one does not want to borrow because if there are no or limited production activity and the customer is not able to sell the finished goods. Borrowers know that if they take money just because banks are giving an extra 10%, does not mean they will be able to sell the goods," said Sabnavis.

Public sector banks have been at the forefront of covid-19 related loans and have, since the lockdown, been providing emergency credit lines to small businesses, retail borrowers and even corporates. State Bank of India (SBI) was the first to announce a credit line of up to 10% of borrowers’ existing working capital loans.

Credit growth has been slackening for several quarters now and came in at 6.66% year-on-year (y-o-y) growth as on 24 April. In fact, between 27 March and 24 April, outstanding credit declined by 1.03 trillion, down 1% in the same period.

A senior banker at a large public sector bank said that while the trend is to defer taking loans during the lockdown, not all borrowers are averse to the idea. He said that some small businesses are asking for working capital loans to pay staff salaries and run partial operations.

“Overall, I would say customers do not want to borrow now but keep their credit lines in place. They might need money immediately after the lockdown and want to keep the sanctioned limit in place," the banker said.

In the retail segment, the banker said, customers are availing only some amount of personal loans because home loans, the largest segment in this category, is on the backburner now.

Home loans constitute more than half of the total retail loans and stood at 13.38 trillion as on 27 March, showed data from RBI. Total retail loans stood at 25.53 trillion in the same period.

Bankers have been saying how they are facing pressure from their superiors and the government to sanction emergency credit lines. However, some experts feel that heightened risk-perception by banks is also leading to a delay in disbursals.

Rajat Bahl, chief rating officer, Brickwork Ratings said it is more to do with banks not willing to disburse loans than reluctance on of borrowers to avail of credit. “Even after the limits are sanctioned, some lenders are not disbursing it citing lack of documentation, thereby making it difficult for borrowers who need money. Moreover, they are quite picky and are willing to push loans only to the high-rated borrowers," said Bahl.

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ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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Published: 17 May 2020, 07:00 PM IST
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