The deluge of liquidity and lower policy rates notwithstanding, bank credit growth remains subdued. Loans from banks grew at 9.5% in May, slower by about 2 percentage points than in March. Also, lending to non-banking financial companies (NBFCs) has moderated to -0.3% year-on-year (y-o-y) in May from 2.9% in April even though the curbs on risk weights have been lifted. Given that transmission is relatively faster for commercial paper (CP) and bonds, rather than for NBFCs and companies where the adjustment of rates takes time, money is moving to CPs and bonds. The stock of bonds and CPs is estimated to have gone up by Rs 0.5 lakh crore and Rs 1.1 lakh crore respectively in the June quarter. There is clearly some degree of disintermediation at play, much like deposits where savings have moved to equity products, robbing banks of cheaper resources and driving up their cost of funds.
Risk aversion
Demand for corporate credit, in particular, has slowed not only because there’s little appetite for building fresh capacity. While it is true India Inc is flush with funds and most companies have the cash flows to run their operations, banks acknowledge that the credit needs of companies remain unmet because of pricing mismatches. Banks are re-pricing deposits but it’s a time-consuming process and they are reluctant to compromise on their margins. At the same time, there is also a fair amount of risk-averseness as lenders remain wary of lending to not-so-well-rated businesses, even as demand for loans has ebbed. In any case, the track record has shown little co-relation between credit growth and interest rates.
Pranjul Bhandari, chief economist, India and Indonesia, at HSBC, believes softening growth in the formal sector, led by gains from strong equity markets, and rising wage growth now plateauing after a strong run is impacting credit disbursements. To be sure, the momentum in the economy has been moderating; the economy has grown at an average of 6.5% y-o-y over the last four quarters compared with 8.5% in the previous eight quarters. While the informal sector is seeing some improvement, households may yet be reluctant to take on long-term leverage. Consequently investment demand, such as that for housing loans, could likely be tepid. On the other hand, households in the informal sector are gaining from higher real incomes and may not now need to borrow to fund consumption.
MSMEs, retail
But it’s in sectors such as micro, small, and medium enterprise and retail, which are likely to expand and throw up demand that the opportunity lies. To cash in on these spaces, lenders need to be a lot less risk-averse. The mess in microfinance, for example, would have certainly chastened banks and we should expect them to scale down disbursements to this space. If liquidity remains abundant as is expected, the corporate bond market will be the more attractive source of borrowing for companies and banks could lose more share. Of course, demand for credit can get a boost if India is able to cash in on the opportunity to become a big player in the global supply chain. That could lead to the creation of additional manufacturing capacity and more jobs, giving the economy a big fillip. In the near term, demand for credit should pick up in the second half of the year. With a larger share of deposits re-priced, banks should be more willing lenders. But with consumption trends muted, loan growth this fiscal will likely be unexciting.