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Credit demand fails to pick up despite aggressive rate cuts


MUMBAI: The year 2020 witnessed bank credit growth remaining 200 basis points lower than a year earlier despite record low interest rates. The average 5.7 percent in the last two fortnights up to Dec. 6 shows compared with 7.9 percent in the last year ame period. Even this slow growth was more due to the Emergency Credit Line Guarantee Scheme and not backed by demand from industry.

Besides 115 basis points reduction in the benchmark repo rate, the rate at which RBI lends to bank, the central bank has infused liquidity into the system through unconventional tools such as LTRO/TLTRO operations to make loans cheaper. The weighted average lending rates-WALR- on fresh loans was down from 8.82 % in March to 8.38% in October. WALR on outstanding loans down from 10% in March to 9.52% in October.

The Emergency Credit Line Guarantee Scheme (ECLGS), seen as lifeline from the government under the “Atmanirbhar Bharat” scheme which provides 100% guarantee coverage to banks and NBFCs to enable them to provide emergency credit facilities worth Rs 3 lakh crore to eligible borrowers to meet their working capital requirements is seen to be a major driver of credit. As of end December, such loans are estimated to cross Rs 2 lakh crore.

Micro, small & medium industries are the major beneficiaries under the scheme. These loans grew by 4.3% in October 2020 as compared with a contraction of 0.8% in the previous year. ” Given the asset quality concerns, banks have been being very selective with their credit portfolios” said Madan Sabnavis chief economist Care Ratings.”However, the overall bank credit growth has been backstopped by disbursements under ECLGS scheme” The scheme has been extended further till March 31, 2021.

Loans to large industries on the other hand contracted by 2.9% in October 2020 as compared with a growth of 4.2% in October 2019, according to the latest RBI’s data on sectoral deployment on bank credit. Large corporates are also saving cost to improve their profits. “The pandemic and resultant economic disruption have impinged on credit demand and could lead to a further credit deterioration in the performance of banks” Sabnavis said .” This could resulting in need of higher provisioning impacting the performance of banks and requirement of higher capital”.

But retail segments are seeing some revival of demand according to credit bureaus. “When lockdown restrictions started to ease, there was a marked change in lender risk strategies, with some returning to the market far quicker than others” said Abhay Kelkar, vice president of research and consulting for TransUnion CIBIL.” Public sector banks were amongst the first and earliest to see a resurgence in demand. Equally, lender appetite for risk has changed, with some providers moving away from extending new credit completely”

But from the monetary authorities perspective, the credit off take looks much better now that the first two quarter of the pandemic. ” Broader measures of deposits, bank credit and money supply are stabilising from a prolonged decline that started in 2010″. said RBI deputy governor Michael Patra in the latest Monetary policy committee -MPC- minutes. “In fact on a financial year basis, credit growth turned positive for the first time in 2020-21 in November”.

Better days could be coming ahead. “It could be the turning point in credit offtake but is not clear at this stage and, in any case, it has not yet acquired strength to alter the growth-inflation trade” said internal MPC member Mriddul Sagar.

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