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India Inc Losing Appetite For Bank Credit

Author: Dasari Sreenivasa Rao/Thursday, April 15, 2021/Categories: Exclusive

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India Inc Losing Appetite For Bank Credit

Reserve Bank of India (RBI) has been taking measures to speed up the economic recovery amid rising number of Covid-19 cases in the wake of second wave of pandemic large over the day-to-day life. Towards this, RBI Governor Shaktikanta Das directed banks to ensure credit flow to the Indian industry and business firms. However, Indian industry finds it difficult to ride on credit line to enhance topline as the manufacturing activity is reeling under pressure created by the second wave of pandemic. 
RBI recently released BSR1 of the SCBs for December 2020 and it indicate that personal loans accounted for one-fourth of total bank credit and continued to record double-digit growth, while industrial loans remained in contraction zone. Among the institutional sectors, growth in credit to the household sector was sustained and its share in total credit increased to 52.3 per cent in December 2020 (50.3% in December 2019).
While, private corporate sector recorded negative growth in bank credit (y-o-y) for the fifth successive quarter, reflecting tepid demand conditions. The share of private corporate sector in total credit declined to 28.5 per cent in December as compared with 31.4 per cent a year ago and 34.5 per cent two years ago.
Further, the domestic manufacturing and mining sectors witnessed a sharp fall in production levels as these two segments led to a slump in India's industrial output in February 2021. 
According to a latest data from Union Ministry of Statistics and Programme Implementation, the Index of Industrial Production (IIP) for February contracted by 3.6 per cent over the same month a year ago. On a sequential basis, the IIP had contracted by 0.87 per cent. For the April-June period of the previous financial year, it fell by 11.3 per cent. For the month of February 2021, the Quick Estimates of Index of Industrial Production (IIP) with base 2011-12 stands at 129.4.
"Growth pattern of primary and intermediate goods, two leading indicators of industrial production are pointing towards a lacklustre industrial performance in short- to medium-run. This also means the government and the RBI will have to continue to support the demand," says Devendra Kumar Pant, chief economist, India Ratings and Research (Ind-Ra). 
The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of February 2021 stand at 116.5, 129.3 and 153.9, respectively. These 'Quick Estimates' will undergo revision in subsequent releases as per the revision policy of IIP.
Sunil Kumar Sinha, principal economist at Ind-Ra, adds: "Growth recovery from the Covid-19 induced slump has been sharper than anticipated. However, the second wave of Covid-19 infections in certain parts of the country and the associated localised lockdowns could adversely impact the growth impulses in the economy and delay the return to normalcy despite the ongoing vaccination drive. Further, the downside of the sharper than anticipated recovery has been an abrupt rise in the global commodity prices leading to cost-push pressure on inflation."
It's further vindicated by the statement from global agency Fitch Ratings, which said the second wave of Covid-19 infections poses increased risks for India's fragile economic recovery and its banks.
Fitch in latest forecast elaborated that "the government's more accommodative fiscal stance may also mitigate some short-term growth pressures. However, inoculating India's large population in a fast and effective way will be important to avoid repeated disruptions. India's second wave of Covid-19 infections poses increased risks for fragile economic recovery and its banks. Fitch forecasts India's GDP growth at 12.8 per cent for the current financial year ending March 2022 and this incorporates expectations of a slowdown in the April-June quarter due to the flare-up in new coronavirus cases. But the rising pace of infections poses renewed risks to the forecast."
RBI Governor discussed the liquidity scenario and monetary transmission and credit flows to different sectors including MSMEs and retail. Public-sector banks (PSBs) told to be cautious on the evolving situation as the RBI emphasised the importance of credit flow to sustain the nascent economic recovery amid rising coronavirus cases.
Das is hopeful that recent policy measures taken by RBI to further support the ongoing recovery, while preserving financial stability.
Das touched upon the importance of credit flows in sustaining the nascent economic recovery and advised banks to remain watchful of the evolving situation and continue taking measures proactively for maintaining their business continuity, sharpening business strategies and raising adequate capital for strengthening balance sheets.
RBI also advised banks to maintain a close vigil on the payments and other IT systems operated by banks and fortifying those for enhanced efficiency and resilience so as to offer seamless and uninterrupted customer service. 
Among other matters, progress in the implementation of Covid Resolution Framework, outlook on stresses assets and capital augmentation came up for discussion. RBI is keen on the current liquidity scenario, monetary transmission and credit flows to different sectors, including MSMEs, and retail segments. 

Challenging Situation For Banks
Indian banking sector already suffered a bad year in FY21 in the wake of the pandemic and is now continuing to face another challenging year in FY22 as well thanks to the second wave of Covid-19. The current situation is clouded by uncertainty on both growth and asset quality. The March quarter metrics may finally throw light on the actual asset quality picture, while headline profitability metrics may depend on how proactive lenders were on provisioning in the previous quarters. Healthy loan growth and higher net interest margin will buffer banks’ core interest income. However, the Supreme Court’s ruling on interest for loans may result in an additional hit for lenders.
Due to the initial restrictions on movement, the credit growth of the Indian banking industry had declined to 5.1 per cent by September from 6.1 per cent in March 2020, on the other hand, deposit growth remained robust in the double digits, reflecting precautionary saving in the face of high uncertainty. However, credit offtake picked up the pace thereafter and touched 6.6 per cent in February (vis-à-vis 6.1 per cent in the corresponding period of the previous year). 
Even on YTD basis (till March 12, 2021) the ASCBs advances increased to 4.1 per cent (Rs 4.27 lakh crore) in FY21, compared to last year YTD growth of 3.8 per cent (Rs 3.68 lakh crore). The sectoral data for February, which accounts for about 90 per cent of the total bank credit deployed by 30 SCBs, indicates that the credit has jumped in both YTD and YoY basis in Agri & services, while there is a deceleration in industry and personal loans, observes Fitch.
Fitch Ratings further elaborated increased risks for India's fragile economic recovery and its banks in the wake of the second wave of Covid-19 infections.
The rating agency expects a moderately worse environment for the Indian banking sector in 2021, but headwinds would intensify if rising infections and follow-up measures to contain the virus further affect business and economic activity. India's active Covid-19 infections have been increasing at a rapid pace with new infections exceeding one lakh a day in early April 2021, against 9,300 in mid-February. 
Fitch in the report further elaborated that "over 80 per cent of the new infections are in six prominent states, which combined account for roughly 45 per cent of total banking sector loans. Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely." 
The operating environment for banks will most likely remain challenging against this backdrop. This second wave could dent the sluggish recovery in consumer and corporate confidence, and further, suppress banks' prospects for new business. There are also asset quality concerns since banks' financial results are yet to fully factor in the first wave's impact and the stringent 2020 lockdown due to the forbearances in place. 
Fitch forecasts risk for the MSMEs and retail loans of banks. "Retail loans have been performing better than our expectations, but might see increased stress if renewed restrictions impinge further on individual incomes and savings. MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring," remarked Fitch. 
It said the extension of the MSME refinancing scheme until June 30, 2021, will alleviate short-term pain, but potentially add to the sector's exposure to stressed MSMEs, which was around 8.5 per cent of loans at the end of December, as per Fitch's estimate. 
"Nevertheless, we believe the second wave could have a more modest impact than the initial wave on our assessment of the operating environment in India, based on global examples of residents and economies adjusting their activities - including much less stringent and more localised restrictions than last year," it added.
Sinha further added that "though cost push pressure has partially been offset by the normalisation of supply chains, it will remain a driver of future inflation. While growth outlook and consumer sentiment once again looks somewhat unstable due to the second wave of Covid-19 infections, inflation outlook amid the bumper foodgrain production and rising global commodity prices appear to be more evenly balanced. Thus Ind-Ra believes RBI to continue with its accommodative policy stance and maintain status quo on policy rate over the next six to nine months."

Status Quo on Interest Rates
With an objective of supporting a faster economic recovery amid a resurgence of Covid-19 cases, RBI has retained its key short-term lending rates along with the growth-oriented accommodative stance at the first monetary policy review of FY22. Accordingly, the Monetary Policy Committee (MPC) of the central bank voted to maintain the repo rate, or short-term lending rate, for commercial banks at four per cent.
Likewise, the reverse repo rate was kept unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.
In most of the world, the interest rates are low or near zero. In India, interest rates are hovering around four per cent (repo or bank rate). The effective federal fund rate in the US is 0.07 per cent, the marginal lending facility rate in the Euro area is around 0.25 per cent, and so is the case with Japan. All of the above corroborates the fact that India still has room for manoeuvring when it comes to the exchange rate.

G-SAP 1.0 by RBI
RBI is making its first purchase of government securities (G-Secs) for an aggregate amount of Rs 25,000 crore under G-SAP 1.0 on April 15, 2021. The G-Sec Acquisition Programme (G-SAP) is basically an unconditional and a structured open market operation (OMO) from RBI. 
The central bank Governor terms the G-SAP as an OMO with a ‘distinct character’. RBI on April 8, 2021, announced its decision to purchase G-Secs totalling Rs 1 lakh crore in 2021-22 financial year. The word ‘unconditional’ here connotes that RBI has committed upfront that it will buy G-Secs irrespective of the market sentiment. This aspect is crucial as an altogether different literature on the subject emerges once the assumption of certainty/commitment is built in.
RBI has been conducting liquidity management operations like the regular OMOs under the Liquidity Adjustment Facility (LAF), the TLTRO (Targeted Long-Term Repo Operations), the Operation Twist, etc., all of which involve buying/selling of G-Secs/bonds from the open market through an auction, essentially to infuse/suck liquidity into the system, the intent of the G-SAP announced recently is no different. Only the modus operandi is slightly altered. RBI has already clarified that G-SAP 1.0 is not a substitute to other operations, but will complement them as a simultaneous measure. 

The writer is a business journalist with 27 years of experience 

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