Demand for loans shrinks despite liquidity injection
India’s outstanding bank loans shrank during the lockdown despite a massive liquidity injection by the central bank to spur credit growth, indicating demand for loans is ebbing as the pandemic leaves a haze of uncertainty about the future.Updated: May 22, 2020 06:12 IST
India’s outstanding bank loans shrank during the lockdown despite a massive liquidity injection by the central bank to spur credit growth, indicating demand for loans is ebbing as the pandemic leaves a haze of uncertainty about the future.
Total outstanding non-food credit shrank by Rs 1.36 lakh crore, or 1.32%, to Rs 101.83 lakh crore on May 8 from March 27, data from the Reserve Bank of India (RBI) showed.
The country has been placed under a stringent lockdown since March 25 to limit the spread of Covid-19, bringing economic activity to a standstill. Bankers said wilting credit growth is also a result of the lack of demand for loans and cannot be entirely blamed on banks’ reluctance to lend. A senior banker at a large public sector said last week that customers do not want to borrow now but only keep their credit lines in place.
“They might need money immediately after the lockdown and want to keep the sanctioned limit in place,” he had said.
Finance minister Nirmala Sitharaman’s office tweeted on May 12 that state-run banks have sanctioned Rs 5.95 lakh crore in loans between March 1 and May 8. RBI data on credit flow is available from February 28 to May 8 and shows incremental growth of Rs 1.43 lakh crore between these two dates, reflecting a difference of Rs 4.5 lakh crore between sanctions and disbursals.
To be sure, RBI data is on outstanding credit (net of repayments), but since most banks have said that around half of their borrowers have opted for the three-month moratorium, repayments are unlikely to have surpassed fresh disbursements.
That apart, while the government data on sanctions is only for state-run banks, the RBI data is for all commercial banks.
Rating agency Icra said on May 5 that the incremental credit flow from banks stood at Rs 5.9 lakh crore in FY2020, compared with Rs 11.9 lakh crore during the previous fiscal as slowing economic growth curtailed demand for credit and banks became more risk averse. There are expectations of increase in incremental credit flow during FY21, driven by increased credit demand amid weakening cash flows of borrowers, said Karthik Srinivasan, head (financial sector) at Icra.
Meanwhile, the government recently announced measures for small businesses and non-bank financiers, which include Rs 3 lakh crore in guaranteed loans.
Experts said that while banks have not been keen to lend to these high-risk sectors, the government guarantee could be a push in the right direction. A note by IFA Global Research Academy pointed out that the measures are intended at getting credit flow to resume in the banking system.
Lenders have so far been stashing significant sums of money with RBI, sometimes even more than Rs 8 lakh crore, on a daily basis. Banks would therefore rather earn a paltry interest of 3.75% than lend to businesses and consumers.