Though the contraction in bank credit was steep in the two months of the strict lockdown, the magnitude of fall decreased in May, compared to April.
After India stepped into the strict nationwide lockdown in the month of March, bank credit saw a steep fall in the subsequent months of April and May. Despite the Modi government’s efforts to increase liquidity in the market and the RBI’s move to cut repo rate to make loans cheaper, the industry kept away from taking fresh loans from the banks. The non-food credit outstanding in the first two full months of the lockdown — April and May — saw a contraction of 2 per cent since March 2020, which is a fall of Rs 1.81 lakh crore, according to the RBI’s July bulletin.
Though the contraction in bank credit was steep in the two months of the strict lockdown, the magnitude of fall decreased in May, compared to April. The contraction in May stood at Rs 70,901 crore, while the fall in April was of Rs 1,10,896 crore in the non-food credit segment.
Within the non-food segment, the bank credit in the services sector shrank by 2 per cent, while that in personal loans shrank by 2.9 per cent. Even the priority sector, including agriculture, MSME, housing, education loans, etc, saw a contraction of 3.5 per cent in the bank credit in the months of April and May. However, on the brighter side, food credit jumped 53.4 per cent from Rs 51,590 crore in March to Rs 79,135 crore in May 2020.
While the Indian economy is facing strong headwinds from the rising cases of Covid-19, the Reserve Bank of India said that going forward, the credit flow from the banking sector needs to improve in order to help revive the manufacturing sector and private investment in the economy. The central bank has also estimated that the bank deposits are likely to see a spike due to an increase in the precautionary savings of households while lower investment demand is likely to moderate the credit offtake. The role of financial intermediaries, therefore, is going to be vital in ensuring the delivery of credit to sectors severely affected by the pandemic, said the RBI bulletin.