Coronavirus impact: Credit growth likely to remain modest, says RBI

Credit offtake in the economy has been fairly slow with non-food credit growing at 6.1 per cent in FY20 (up to March 13), compared to 14.4 per cent growth in the same period last fiscal year.
With the Covid-19 pandemic posing huge risks for the Indian economy, the credit growth is likely to remain modest, reflecting weak demand and risk aversion, said the Reserve Bank of India (RBI) in its monetary policy (MPC) report.

“Better transmission of monetary policy impulses to the credit market would remain a priority,” the RBI said.

Credit offtake in the economy has been fairly slow with non-food credit growing at 6.1 per cent in FY20 (up to March 13), compared to 14.4 per cent growth in the same period last fiscal year.

According to RBI, the slowdown in credit growth was spread across all banks, especially those in the private sector. However, in the recent period (December 2019-March 2020), the public sector banks (PSBs) have seen a slight uptick in credit offtake.

The data shows that of the incremental credit extended by scheduled commercial banks (SCBs) during the year (March 15, 2019 to March 13, 2020), 62.6 per cent was provided by private sector banks, 36.6 per cent by PSBs, and 0.8 per cent by foreign banks.

The report says banks’ investment in commercial papers (CPs), bonds, debentures, and shares of public and private corporates, which is a part of non-SLR (statutory liquidity ratio) investment, has gone down in the second half of FY20 (up to March 13) than a year ago because of lower investments, resulting non-food credit growth being lower.

“With credit offtake remaining muted and non-SLR investments declining, banks increased their SLR portfolios. Banks held excess SLR of 8.4 per cent of net demand and time liabilities (NDTL) on February 28, as compared with 6.3 per cent of NDTL at the end of March 2019,” RBI said.

“The credit growth will be in the range of 6 per cent in FY21, largely based on expectations of incremental credit growth of around Rs 6 trillion. The demand from corporates for credit will remain muted as expansion will get deferred. On the working capital cycle, there is a demand for working capital loans to tide over liquidity issues but destocking is expected to pull down the demand for those loans. Retail segment is also likely to remain conservative to borrow and spend amid concerns of job losses and possibly salary cuts,” said Anil Gupta, vice-president (financial sector ratings) ICRA.

On the supply side, certain private banks are seeing liability side pressures. And in the absence of liability growth, their ability to grow credit remains a challenge. PSBs have not received any capital this year, which will constrain their ability to push growth considerably, he added.

Meanwhile, the government reduced interest rate on small savings scheme in the range of 70-140 basis points for Q1FY21, broadly aligning the rates on small savings with the prescribed formula-based administered interest rates on small savings. “This augurs well for monetary transmission going forward,” the RBI said.

According to RBI, the spreads between lending rates in the credit market and corporate bond yields have risen sharply since January 2019, implying faster transmission of policy rate cuts to the corporate bond market as against relatively muted transmission to the credit market.

However, since the October 2019 monetary policy, the weighted average lending rate (WALR) on outstanding rupee loans has declined 18 bps as opposed to a rise of 2 bps during February-September 2019. The WALR on fresh rupee loans declined by 71 bps (February 2019-February 2020). Of this, a decline of 31 bps occurred during October 2019-February 2020, the RBI said.

In the February-September 2019 period, the committee cut benchmark rates by 110 bps, which showed up in banks’ lending and deposit rates in the second half of FY20. The transmission of rates in banks’ lending rates was also augmented by RBI mandating external benchmarking of rates from October 1, 2019 for loans to select sectors, viz., retail loans and loans to micro and small enterprises (MSEs).

The RBI has said there are early indications of an improvement in transmission to fresh rupee loans sanctioned in respect of sectors where new floating rate loans have been linked to the external benchmark. During October 2019-February 2020, the WALRs of domestic banks has declined in respect of fresh rupee loans sanctioned for housing loans by 34 bps, vehicle loans by 73 bps, education loans by 21 bps, and MSMEs by 6 bps.


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