Why slow credit growth will be a major challenge for India’s economic recovery


A branch of the State Bank of India (SBI) in Mumbai, India. Total lending to Indian commercial banks increased 5.6 percent year over year in the quarter ended March 31, the lowest rate since the second quarter of 2017.
Image source: Bloomberg

Dubai: Slow credit growth, adversely affected on both the supply and demand sides, will be a major challenge for India’s post-pandemic economic recovery, according to bankers, economists and analysts.

In addition to slowing credit growth, the economy is facing hurdles on several fronts, including rising inflation, falling demand and weak consumer sentiment.

At the center of the economic problems is the increasing reluctance of banks to grant loans after the second wave of COVID-19. Total lending to Indian commercial banks rose 5.6 percent year-over-year for the quarter ended March 31, the lowest rate since the second quarter of 2017, according to data released May 28 by the Reserve Bank of India (RBI). Total deposits in the March quarter grew 12.3 percent year-over-year, the fastest quarterly growth since 2017.

Fear of impairment

Credit growth at Indian commercial banks is likely to recover gradually rather than rapidly in 2021 as the country emerges from a deadly COVID-19 wave and struggles to vaccinate the world’s second largest population, rating agency Standard & Poor’s said in a recent report.

India’s banks in general have become cautious after a sharp surge in loan defaults following the first and second waves of the pandemic. RBI expects the banks’ non-performing loans ratio to rise from 7.48 percent in the previous year to 9.8 percent by the end of this financial year.

Analysts fear that increased bank lending could undo much of the government’s pandemic bailout programs, which rely heavily on increased lending by individuals and businesses.

Subdued earnings growth expected in the first quarter due to slower credit growth

The second wave of the Covid-19 pandemic and the resulting partial closings have slowed the growth dynamics of Indian banks.
With pressures on asset quality and credit growth remaining in the 5-5.7 percent range, the industry will post subdued gains for the first quarter of 2022 (Q1 FY22).
“Private banks with a healthy capitalization can grow by 8-10% and gain market share from public banks. Sequentially, growth is expected to be subdued at 1-2% as the first quarter is generally a slow quarter and lockdowns have further increased the pressure, ”said analysts at ICICI Direct.
A number of banks have already released preliminary estimates of key business parameters for the quarter ended June 2021, reflecting lower retail payouts largely due to the negative impact of the second wave, which resulted in the pending retail loan book having to be contacted.
For example, India’s most valuable lender, HDFC Bank, saw retail payouts decrease 30% from the previous quarter. In absolute terms, according to preliminary data, disbursements were 436 billion rupees, less than 62.5 billion rupees in the previous quarter. In the case of Yes Bank, retail customer payouts fell 34.86 percent in the June quarter compared to the end of March, which left a dent in the entire loan book.
“Business was negatively impacted from April to May and we believe the first quarter of FY22 will be a consolidation quarter as the recovery momentum gained from the fourth quarter of FY21 was negatively impacted by the second wave and the outlook for asset quality worsened again. While economic activity has picked up since June, we expect business growth to remain modest in the first quarter of FY22, with systemic credit growth of 9% in FY22. Growth in corporate working capital needs would be another factor to monitor, ”Motilal Oswal analysts wrote in a note.

Slowdown in credit demand and deleveraging

While banks are reluctant to lend on the one hand, companies are on the other hand postponing investment plans due to a lack of demand.

According to the Center for Monitoring Indian Economy Pvt. low, investments are declining. While companies have made record profits largely due to widespread cost reductions, most have used the additional funds to repay bank loans.

According to a recent study by the State Bank of India, India’s largest public bank, debt worth more than 1.7 trillion rupees ($ 22.8 billion) was reduced in the past year. Refineries, steel, fertilizers, mining and mineral products, and textile companies alone cut debt by more than 1.5 trillion rupees, with the trend continuing this year, the bank’s chief economist Soumya Kanti Ghosh wrote in a press release.

Several large companies canceled debts by repaying costly loans with funds from bond sales. India’s private banks have expanded their lending faster than their state competitors. Aggregate lending to private sector banks rose 9.1 percent year over year in the March quarter, compared with a 3.6 percent increase for their public sector counterparts. Deposit growth was similar.

Gradual credit growth

CRISIL, an Indian unit of S&P Global Inc., said in a recent report that it expects bank lending to grow by 9-10 percent for the fiscal year beginning April 1 and a government-announced loan guarantee plan combined with a looser one Monetary policy will support growth, said CRISIL.

Retail, agriculture, and small and medium-sized sectors are likely to drive credit growth for banks, said Krishnan Sitaraman, senior director at CRISIL. “While corporate credit growth will be better than last year, it will continue to be subdued due to capital spending.” [capital expenditure] The recovery that will fuel corporate credit growth is still a long way off, and meanwhile many businesses are consolidating and reducing their debt, “he said.

A lack of bank lending could have a direct impact on demand and economic growth. At the moment, many individuals and companies are looking for loans to restructure their finances or to stabilize operations.

Without retail and small-ticket lending, consumer demand could remain subdued for an extended period of time, which could lead to a slower economic recovery.

Despite the general slowdown, loan use in the midmarket, housing, auto and personal loan segments remained robust in the fiscal year ended March 31, according to RBI data. The use of loans in medium-sized businesses rose by 28.8 percent in the financial year, and housing loans by 9.1 percent. Personal loans rose 10.2 percent.


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