Loan-carnival push may yield little: Overall business sentiment needs to improve for credit-growth to regain its mojo

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August 30, 2021 6:00 AM

The de-growth was contained as a result of the medium industries segment registering a sharp growth of 54.6% in June 2021. Loans to micro and small industries also grew 6.4% in June 2021.

The de-growth was contained as a result of the medium industries segment registering a sharp growth of 54.6% in June 2021. Loans to micro and small industries also grew 6.4% in June 2021.The Ministry of Finance had last week in a statement informed that eight banks have been onboarded onto the AA network.

Finance minister Nirmala Sitharaman wants banks to hold credit outreach programmes in every district of the country. To be sure, this would prompt lenders to disburse some additional quantum of loans. However, the experience of carrying out such an outreach exercise in 2019 showed it can push credit offtake only to a limited extent. Although loan carnivals were held between October 1-9, 2019, incremental non-food credit at the time did not see any spurt; the increase was a mere 0.22% in the fortnight ended October 11, 2019. That was before the Covid outbreak and the rate of non-food credit growth then was 8.72% year-on-year (y-o-y). Since then, demand has ebbed, and banks have turned more wary, leaving loan growth languishing at 6.2% y-o-y.

The idea behind the outreach programmes is to push loans to retail and small business borrowers during the festive season to drive consumption. But, a closer look at data put out by RBI suggests the slack lies in loans to industry and services businesses rather than in the small loans segment. Credit growth to industry actually shrank 0.3% y-o-y at the end of June 2021.

The de-growth was contained as a result of the medium industries segment registering a sharp growth of 54.6% in June 2021. Loans to micro and small industries also grew 6.4% in June 2021.

The laggard was the large industries segment where loans contracted by 3.4% in June 2021. Credit growth to the services sector decelerated as well—to 2.9% in June 2021 from 10.7% in June 2020—as loans to commercial real estate players, non-banking financial companies and the tourism industry slowed. The shrinkage in credit to large industry is a reflection of significant deleveraging by companies of their balance sheets and also increased borrowing from the debt markets, where money has been available quite cheaply. That, in turn, has affected rates on corporate loans, leading some lenders like Bank of Baroda to consciously run down low-yielding portfolios. Poor margins hurt bottom-lines as much as poor loan growth does.

While bankers have spoken of a slow improvement in capex growth, working capital lines remain under-utilised. SBI chairman Dinesh Khara recently observed that while the lender has seen better utilisation of corporate credit lines, the slack was still high at 25%. Retail loans have been the chief driver of credit growth, but they cannot shoulder the burden indefinitely. The second wave of the pandemic in April and May dented household finances across the country, and while there is no definite assessment of the damage, it would not be small. Besides, the household debt-to-GDP ratio has been trending upwards, rising to 37.9% at end-December 2020 from 37.1% at end-September 2020. This rise in indebtedness has happened over a period when interest rates were actually at historic lows. Therefore, banks cannot be faulted for being cautious while extending retail loans. In fact, private players like Kotak Mahindra Bank have been focused on reducing their exposure to unsecured loans.

So while encouraging banks to lend aggressively is good, overall sentiment needs to improve for credit to regain its mojo. One way of ensuring this would be to keep up the pace of vaccinations. For a strong and sustained uptick in credit growth, it is imperative that uncertainty is minimised and businesses feel confident enough to invest.

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