The engine of bank credit in India’s economic growth


The Indian economy has been in a downward credit spiral for a decade. While bank credit figures for the month of November 2021 signal a nascent recovery on an annual basis, non-food bank credit increased by 7.1% – this is by no means a robust signal of the return of momentum. economy on the right track.

Over the years, and before the pandemic, the rate of credit growth has steadily declined, indicating the dismal failure of Indian policymakers to reignite a virtuous growth cycle by amplifying the pull of credit in the economy. .

Overhanging the impact of the Omicron variant will further complicate India’s economic recovery. Given the variant’s high infection rate, another round of lockdown – even if localized – will further delay consumption and push banks and businesses into a deeper risk zone.

Gross bank credit is divided into two flows, namely food credit and non-food credit. While food credit is credit given by banks to Food Corporation of India and other state government agencies to ensure more thorough food distribution in India, non-food credit is given to different sectors of the economy and is considered as the parameter to account for in order to monitor bank lending to the economy.

From the highs of FY2008, when the non-food credit growth rate was an impressive 22.9%, the metric dropped to 14% in FY2013 and since then has plunged to a dismal 5.5% in March 2021. -the food bank credit growth rate, although at 7.1%, is still far from the credit drawdown of the good times.

Even as regular commercial banks have moved away from aggressive lending, the space they free up is increasingly occupied by NBFCs and HFCs. The “Flow of Resources to the Commercial Sector”, an indicator which captures the financing of the economy from a number of flows, perfectly reflects the reluctance of the Indian banking sector to increase its lending capacity between FY’11 and FY’21. Between FY’11 and FY’21, adjusted non-food bank credit growth slowed to 2.15% on a CAGR basis.

The adjusted parameter of bank credit also includes investments made by banks in bonds, stocks, commercial paper and debentures, with the exception of non-food bank credit. On the other hand, flows from domestic sources, which include financing for NBFCs and HFCs, increased by a CAGR of 8.27%. The sourcing of funds from foreign sources, which includes external borrowings, increased over the same period at a CAGR of 3.81%.

RBI Deputy Governor Michael Patra, during his speech in November, acknowledged:

“Before the onset of COVID-19, the GPA ratio of banks in India stood at 8.3% at the end of March 2020. It fell further to 7.5% at the end of March 2021, which shows that banks have used the pandemic period to improve recoveries. and write off bad debts while building higher provisions on their balance sheets. With banks in risk aversion mode, non-bank sources (domestic and foreign) have contributed as much, if not more, in recent years to the flow of resources to the Indian business sector.

Why has credit growth collapsed?

A combination of factors contributed to the dramatic fall in bank lending in India, with the predominant reason being the sharp rise in NPAs weighing on banks’ balance sheets. In 2012, banks started to review their loan disbursements cautiously, and this trend took further root in light of the asset quality review exercise launched by the RBI during the August period. -November of the 2016 financial year.

The growing risk aversion of SCBs over the years has also led to a decline in the total share of industrial credit exposure for the banking sector. Since 2013-14, the share of deployment of bank credit to the industrial sector has fallen from 45% to 30% in September 2021.

Indian banks have gradually extended lending to the industrial segment and shifted towards consumer lending and the NBFC sector. Not surprisingly, bank credit for the NBFC sector grew by a CAGR of 18.9% from FY09 to FY21, while personal loans grew by a CAGR of 13.2%.

Made with Flourish

The shortfall in bank lending to the corporate segment was caught up by NBFCs and bond markets. Lower interest rates helped NBFCs and bond issuers access ample liquidity. The good times, however, were punctuated by the ILF&S default which raised greater apprehensions about the health and terms of NBFC’s loan dynamics. Worse still, the Indian bond market is far from fully mature. One of the fallouts of this stunted growth is that only the highest rated companies are able to tap into this market and meet their capital needs. Investor appetite for sub-A rated bonds appears to be quite low, leaving a host of companies on the hook when it comes to raising cash for working capital and business expansion. business.

The prevailing corporate deleveraging trend further complicates credit growth in India. The pandemic has further exacerbated matters and dampened any nascent demand for credit in the corporate space. Investment activity in the business sector has slowed amid uncertainty about the future.

A Care Ratings report published in September 2021 observed deleveraging across all sectors in FY21 in its sample of 794 companies

“If we exclude finance companies, the sample of 691 companies shows a steeper decline in outstanding debt. Over the past 5 years ending FY21, total debt stock growth was a CAGR of 9.2% for the largest sample, which equates to 5% for the sample excluding finance companies. Overall, the debt of the 691 companies fell from Rs 9.47 lakh crore in FY’17 to Rs 11.50 lakh crore in FY’21. However, during this period, it had declined in FY2018 to Rs 9.37 lakh crore and again in FY21 from Rs 12.81 lakh crore in FY21. FY20. In FY2019, the debt was Rs 10.41 lakh crore. Clearly, the deleveraging trend is not just a pandemic situation, but a policy that was followed after the AQR process when banks came under pressure due to inflated NPAs. says the report.

What does the future hold?

Things will get worse for the Indian banking sector before they get better.

A combined reading of the two RBI reports – the Financial Stability Report and the India Banking Trend and Progress Report – paints a superficial picture of the banking sector’s recovery. While the data supports nascent signs of recovery, it would be misleading to take it at face value, disregarding the headwinds looming over India’s macro scene.

Bank credit growth in 2021 has remained subdued, indicating that the overhang of shutdowns and fear of another wave continue to discourage business activity across the country. Consider, for example, that gross bank credit for public sector banks rose a dismal 3.09%. Private banks performed much better than PSBs, recording credit growth of 8.6%, but this growth was offset by the performance of foreign banks where credit disbursement slowed by Rs 4.28 lakh crore in 2020 to Rs 4.23 lakh crore in 2021.

Gross NPAs for all scheduled commercial banks decreased to 7.3% from 8.2% the previous year. Provisional prudential data indicates that the ratio is expected to cool to 6.9% by the end of September 2021. The same downward trend was observed in terms of net NPAs which in 2021 reached 2.4% against 2.8% per year. earlier.

However, the stress tests carried out by the RBI paint a grim picture. Given the dangerous spread of the Omicron variant, their findings become quite relevant and disturbing. Stress tests that assess the resilience of scheduled commercial banks’ balance sheets to shocks arising from the macroeconomic environment indicate that the GNPA ratio of all SCBs could increase to 8.1% by September 2022 under a scenario established baseline and then to 9.5% in a severe stress scenario. Within banking groups, the PSB NPR ratio of 8.8% in September 2021 could deteriorate to 10.5% in September 2022 in the baseline scenario; for private banks, the share of bad debts could increase from 4.6% to 5.2% and for foreign banks, it should increase from 3.2% to 3.9% over the same period.


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