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. Aggregate credit at Indian commercial banks grew 5.6% year-on-year in the quarter ended March 31, the lowest rate since the second quarter of 2017.
Image Credit: Bloomberg

Dubai: Negatively impacted on both supply and demand, slow credit growth 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 faces obstacles on several fronts, including rising inflation, slowing demand and weak consumer confidence.

At the heart of the economic problems is the growing caution of banks in lending in the wake of the second wave of COVID-19. Overall credit of Indian commercial banks rose 5.6% year-on-year in the quarter ended March 31, the lowest rate since the second quarter of 2017, according to data released by the Reserve Bank of India (RBI) , May 28. in the March quarter grew 12.3% year-on-year, the fastest quarterly growth pace since 2017.

Fear of impairments

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

Indian banks in general have become cautious after a sharp increase in defaults following the first and second waves of the pandemic. The RBI expects the bad debt rate on banks to climb to 9.8% by the end of this fiscal year, from 7.48% a year ago.

Analysts fear that the bank lending crunch could reverse the majority of the government’s pandemic relief programs that rely heavily on higher loans from individuals and businesses.

Moderate Q1 earnings growth expected due to slower loan growth

The second wave of the Covid-19 pandemic and the resulting partial lockdowns have dampened the growth momentum of Indian banks.
With pressure on asset quality and credit growth remaining in the 5-5.7% range, the industry is expected to post modest profits for the first quarter of 2022 (Q1 FY22).
Private banks, with healthy capitalization, could grow 8-10%, gaining market share over public banks. Sequentially, growth is expected to moderate at 1-2% as the first quarter is generally a slow quarter and lockdowns have added pressure further, ”ICICI Direct analysts said.
A number of banks have already disclosed provisional estimates on key business metrics for the quarter ended June 2021, reflecting lower retail disbursements mainly due to the negative impact of Wave 2, resulting in a portfolio of retail loans outstanding to contact.
For example, India’s most valuable lender, HDFC Bank, recorded a 30% quarter-over-quarter contraction in retail disbursements. In absolute terms, disbursements amounted to Rs 436 billion, lower than the Rs 62.5 billion disbursed in the previous quarter, according to provisional data. In the case of Yes Bank, retail disbursements fell 34.86 percent in the June quarter compared to the quarter ended in March, leaving a dent in the overall loan portfolio.
“Business activity was affected from April to May and we believe the first quarter of fiscal 22 will be a consolidation quarter as the recovery momentum gained in the fourth quarter of fiscal 21 has been affected. by the second wave, the outlook for asset quality deteriorating again. While economic activity has started to recover since June, we expect business growth to remain modest in the first quarter of FY22 and estimate systemic loan growth of 9% for FY22. Another controllable element would be growth in working capital requirements in the corporate segment, ”analysts at Motilal Oswal wrote in a note.

Slowing demand for credit and deleveraging

While banks are reluctant to lend on the one hand, companies are pushing back their investment plans in the face of lack of demand on the other.

Business willingness for new investment is low, according to the Center for Monitoring Indian Economy Pvt., With capital spending on the decline. While companies recorded windfall profits mainly from widespread cost reductions, most used the additional funds generated to repay bank loans.

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

Several large companies have deleveraged by paying off expensive loans with funds from bond sales. Indian private sector banks have increased their credit faster than their public counterparts. Overall credit of private sector banks grew 9.1 percent year-on-year in the March quarter, compared to a 3.6 percent increase for their public sector counterparts. The growth of deposits followed a similar path.

Gradual credit growth

CRISIL, an Indian unit of S&P Global Inc., said in a recent report that it expects bank lending to grow in the 9-10% range for the fiscal year that began April 1. Fiscal support measures, such as increased spending and a government-announced credit guarantee plan, combined with accommodative monetary policy, will support growth, CRISIL said.

The retail, agriculture, and small and medium-sized business sectors are likely to drive credit growth for banks, said Krishnan Sitaraman, senior director of CRISIL. “Business credit growth, although expected to be better than the previous year, will still be moderate as capital spending [capital expenditure] the recovery, which is boosting business credit growth, is still a long way off, and in the meantime, many companies are consolidating and deleveraging, ”he said.

The lack of credit lending by banks could have a direct impact on demand and economic growth. Today, many individuals and businesses are looking for loans to reshape their finances or stabilize their operations.

In the absence of retail loans and small notes, consumer demand could remain subdued for a longer period, causing the economic recovery to slow down.

Despite the overall slowdown, credit rollout in the midsize, home, auto and personal loan segments remained robust in the fiscal year ended March 31, according to RBI data. The deployment of credit to midsize businesses grew 28.8 percent during the year, while home loans grew by 9.1 percent. Personal loans increased 10.2%.

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