Small borrowers stay clear of sanctioned loans as rates rise

Calculations based on recent data released by the Reserve Bank of India (RBI) showed that from a utilisation of 67.3% in December, and 66.9% in March, it stood at 65.5% in June, even as their total credit limit grew in the same period. RBI defines ‘small borrowal account’ as one with a credit limit of up to ₹2 lakh, with holders of these accounts being individuals or entities with relatively small credit requirements.

Their sanctioned loans have outpaced outstanding loans in the June quarter on a year-on-year (y-o-y) basis. While sanctioned loans of up to ₹2 lakh grew 14%, outstanding loans grew a tad slower at 11.5%, the data showed.

Experts said these are typically micro businesses who are more prone to getting impacted by changes in interest rates. Between May last year and this February, RBI has increased the repo rate – used as a benchmark to price loans to retail and small business borrowers — by 250 basis points (bps) to 6.5%, before pausing in April.

According to an economist at a bank, small borrowers are under the external benchmark regime and therefore any changes in the repo rate are passed on to them, impacting their finance cost. “Credit card limits could also be included in this and indicates that while banks have increased limits, borrowers have not used a lot of it," said the economist cited above.

Loans of up to ₹2 lakh comprise 74% of total borrowers and 7.4% of outstanding loans in India as of the June quarter, as against 75% of borrowers and 7.6% of outstanding loans in June 2022.

Others said the decline in utilisation has been owing to a weakening of business prospects for small enterprises. Micro, small and medium enterprises (MSMEs) witnessed topline growth concerns in the June quarter even as the bottomline improved, as per analysis by Bank of Baroda released on 18 August.

“The Indian economy is performing well but that is primarily being driven by large companies. Small businesses are yet to overcome the hangover of the covid-19 pandemic that dented their operations, with some owners even shutting shop and migrating to rural areas for farm jobs," said Madan Sabnavis, chief economist, Bank of Baroda.

Sabnavis said that since their performance has not been strong, these enterprises do not require more loans, thereby reducing the utilisation of bank credit lines.

“Since these enterprises are small and size, they are also more susceptible to changes in interest rates and could have thus reduced their utilisation to counter the pressure of higher outgo on interest," he said.

Meanwhile, as per a banking sector analyst, there could be some retail component in these small borrowal accounts which could include credit cards and small loans that have been sanctioned but remain unused.

Research by RBI showed that the share of small borrowal accounts, both in numbers and amount of credit, showed an increase in the 1970s and 1980s. Thereafter, there was a steady fall in their shares over the 1990s and 2000s, according to a paper released in November 2016. The definition of such accounts has also changed over time, from a credit limit of ₹10,000 till 1983, and ₹25,000 till 1998.

“This trend came out even after accounting for a change in the definition of small borrowal accounts," it said.

In fact, small finance banks have been lauded for their focus on small borrowal accounts. In March 2020, about 96% and 48% of their total loan accounts and total loan amount, respectively, had a credit limit of ₹2 lakh, an article in RBI’s January 2021 bulletin pointed out.