Bank credit engine in India’s economic growth

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The Indian economy has been in a downward credit spiral for the past decade. While bank lending figures for November 2021 signal a nascent recovery on an annual basis, non-food bank lending rose 7.1% – by no means a strong signal of the recovery. of economic dynamics. .

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

The impact of the Omicron variant will further complicate India’s economic recovery. Based on the variant’s high infection rate, another lockdown – even localized – will further delay consumption and push banks and businesses into a deeper risk area.

Gross bank credit is divided into two components, namely food credit and non-food credit. While food credit is credit given by banks to the Food Corporation of India and other state government agencies to ensure deeper food distribution in India, non-food credit is given to different sectors of the world. economy and is considered to be the count parameter in order to monitor bank lending to the economy.

Since the peaks of fiscal 2008 when the growth rate of non-food credit was at an impressive 22.9%, the metric has fallen to 14% in FY’13 and since then has plunged to a dismal 5.5% in March 2021. The November no-food bank credit growth rate, even when it hit 7.1%, is still a long way from the credit consumption of the boom period.

Even though programmed commercial banks have pulled back 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 that 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, the adjusted growth of non-food credit decelerated by 2.15% on a CAGR basis.

The adjusted bank credit parameter 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 funding for NBFCs and HFCs, increased by a CAGR of 8.27%. The supply of funds from foreign sources, including external borrowing, increased over the same period at a CAGR of 3.81%.

RBI Deputy Governor Michael Patra during a speech in November admitted it:

“Before the onset of COVID-19, the GNPA ratio of banks in India stood at 8.3% at the end of March 2020. It declined further to 7.5% at the end of March 2021, showing that banks have used the pandemic period to improve recoveries. and write off insoluble loans while making higher allowances on their balance sheets. As banks are risk averse, non-bank sources (both domestic and foreign) have contributed as much, if not more, in recent years to the flow of resources to the Indian commercial sector.

Why is credit growth collapsing?

A combination of factors has contributed to the dramatic fall in bank lending in India, the main reason being the sharp increase in NPAs weighing on banks’ balance sheets. In 2012, banks began to be cautious about their loan disbursements, and this trend was reinforced in light of the asset quality review exercise launched by the RBI during the August-November period. in FY’16.

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

Indian banks have gradually launched lending to the industrial segment and turned to consumer lending and the NBFC sector. Not surprisingly, bank credit for the NBFC sector increased by a CAGR of 18.9% between FY’09 and FY’21 while personal loans increased by a CAGR of 13.2%.

Made with flourish

The deficit in bank loans to businesses was filled by the NBFCs and the bond markets. Falling interest rates have helped NBFCs and bond issuers access plentiful liquidity. The good times, however, were punctuated by the default of the ILF & S which raised greater concerns about the health and terms of the NBFC’s lending dynamics. The worst part is that the bond market in India is far from reaching full maturity. A consequence of this stunted growth is that only the best rated companies are able to tap into this market and meet their capital needs. Investor appetite for below-A-rated bonds appears to be quite low, leaving a host of companies struggling to raise funds for working capital and business expansion.

The prevailing trend of corporate deleveraging is exacerbating the credit growth problems in India. The pandemic has exacerbated matters further and dampened any burgeoning demand for credit in the business space. Investment activity in the corporate sector has slowed due to uncertainty about the future.

A Care Ratings report published in September 2021 observed deleveraging across all sectors in FY’21 in its sample of 794 companies

“Excluding finance companies, the sample of 691 companies shows a more marked drop in outstanding debt. Over the past 5 years ending FY’21, the growth in total outstanding debt was a CAGR of 9.2% for the larger sample which drops to 5% for the sample excluding financials. Overall, the debt of 691 companies increased from Rs 9.47 lakh crore in FY’17 to Rs 11.50 lakh crore in FY’21. However, during this period it had decreased in FY’18 to Rs 9.37 lakh crore and again in FY’21 from Rs 12.81 lakh crore to FY’20. In FY19 the debt was Rs 10.41 lakh crore. Obviously, 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 swelling 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 cursory picture of the recovery for the banking industry. While the data supports emerging signs of recovery, it would be misleading to take them at face value, ignoring the headwinds looming over India’s macroeconomic scene.

Bank credit growth in 2021 has remained lukewarm, indicating that overhang of lockdowns and fears of a new wave continue to deter business activity across the country. Consider, for example, that gross bank lending for public sector banks has increased dismally by 3.09%. Private banks outperformed PSBs with 8.6% credit growth, but this growth was offset by the performance of foreign banks where credit disbursement increased from Rs 4.28 lakh crore to 2020 at Rs 4.23 lakh crore in 2021.

Gross NPAs for all scheduled commercial banks were reduced to 7.3% from 8.2% the previous year. Provisional prudential data indicate 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, stress testing by the RBI paints a grim picture. Given the dangerous spread of the Omicron variant, their findings all become relevant and disturbing. Stress tests that assess the resilience of expected commercial bank balance sheets to shocks resulting from the macroeconomic environment indicate that the GNPA ratio of all SCBs could increase to 8.1% by September 2022 under an established baseline scenario and still at 9.5% in a severe stress scenario. Within banking groups, the GNPA ratio of PSBs of 8.8% in September 2021 could deteriorate to 10.5% in September 2022 in the reference scenario; for private banks, the share of bad loans could drop from 4.6% to 5.2% and for foreign banks, it should drop from 3.2% to 3.9% over the same period.


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