Having come up with emergency credit lines to help businesses weather the Covid storm, banks are seeing little demand for fresh credit at this stage. With large parts of the country still under lockdown and sales of non-essential goods non-existent, companies have no appetite for fresh loans.
To push credit growth under pressure from the government, banks are now unilaterally sanctioning enhancements to borrowers’ credit limits, even as they lie unused. The lack of demand for credit has been leading banks to park huge amounts under the Reserve Bank of India’s (RBI) reverse repo window, going up to as much as Rs 8.42 lakh crore on Monday, the largest single-day amount ever.
Public-sector banks (PSBs) such as State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Canara Bank, Union Bank of India and Bank of India (BoI) launched these special credit facilities in late March soon after the nationwide lockdown began.
Bankers FE spoke to said since there is no certainty about when economic activity will resume fully, businesses are in no mood to borrow. A senior executive with a large PSB said, “Even though emergency lines are available, borrowers are not willing to take money because they want to wait for things to start. So, there are not many takers for emergency credit lines as of now. Once everything opens, there may be a pick-up in demand.”
Manufacturing firms have been telling banks that they are currently sitting on stock for a couple of months and their vendors are unable to make any commitments about the stock they want to take up. Barring essential goods and services, there is no consumer demand for anything at present and that is holding back credit growth.
Meanwhile, zonal managers and branch-level executives at banks have been directed to suo motu enhance borrowers’ working-capital limits or term loans by 10% and defer repayment. “Even without sending the application, borrowers are getting this enhancement over email with a copy to head office. The head office then collates the figures and informs the government that such and such amount of credit has been disbursed. But at the ground level nothing is happening,” a banker with a mid-sized PSB said.
Credit offtake remained on a downward slope throughout FY20 and the spread of Covid-19 has ensured the trend continues into FY21. On Tuesday, rating agency Icra said the incremental credit flow from bank credit, bonds outstanding and commercial paper during FY20 declined by 64% to Rs 6 lakh crore from Rs 16.79 lakh crore during FY19.
Karthik Srinivasan, Icra group head (financial sector ratings) said the sharp decline in incremental credit during FY20 was driven by slowing economic growth as well as heightened risk aversion among lenders. “Nonetheless, the expectations of increase in incremental credit flow during FY21 is driven by increased credit demand amid weakening cash flows of borrowers because of Covid-19 induced stress; as well as capitalisation of interest for the period of moratorium offered by lenders,” Srinivasan said, adding, “Lower external commercial borrowings (ECB) coupled with TLTROs (targeted long-term repo operations) could also drive up the domestic credit growth.”