Bank credit grows sans large industrial units

by Manasi Swamy

Scheduled commercial banks (SCBs) expanded their outstanding non-food credit for second straight month in July 2020, as the unlock process began in India. They made net disbursements of credit of Rs.220.4 billion in July 2020, higher than the net disbursements of Rs.172.7 billion made in June. Net credit disbursals or net credit offtake are fresh disbursals of credit adjusted for repayments. During April-May 2020, the strictest spell of the Covid-19 induced lockdown, disbursal of new loans had dropped to a point where repayments of bank loans had exceeded fresh disbursals by Rs.1.8 trillion.

Personal loans led the show in July. Outstanding personal loans grew by Rs.408.5 billion, after rising by Rs.115.2 billion in June. Net disbursals of personal loans had remained in the negative zone in April and May 2020.

Nearly 30 per cent of the net disbursals of personal loans in July, amounting to Rs.116.6 billion, came from the home loans segment. Top realtors, Oberoi Realty and Brigade Enterprises, claimed to have seen a V-shaped recovery in demand in the housing segment in July, and more in August. According to them, not only did the footfalls improve, but also the conversion rate increased to 20-25 per cent from 10 per cent in the pre-Covid-19 period. Residential real estate sales in top eight cities had dropped by 79 per cent year-on-year to 19,038 units during April-June 2020. During the same quarter, net disbursals of home loans had slipped into the negative zone, with repayment exceeding fresh advances by Rs.30.6 billion.

Net monthly disbursal of transport vehicle loans came out of the negative zone in June, at Rs.540 million, and these advanced further to Rs.31 billion in July. This mimics the movement in domestic sales of passenger cars and two-wheelers, which remained absent in April, improved to 0.3 million units in May and further to 1.1 million units in June and 1.4 million units in July.

Credit card outstanding increased by Rs.38.1 billion in July. This was the second consecutive month in which credit card outstanding rose, albeit at a slower pace than the Rs.47 billion rise seen in June. Remaining sub-categories of personal loans, namely, consumer durables, education, advances against fixed deposits, shares and bonds and others reported an increase in their respective portfolios in July.

While revival in net personal loan disbursals is a positive sign for the economy, it is yet not clear whether this is only a pent-up demand or sustainable improvement.

Outstanding loans disbursed for agriculture and allied activities increased by Rs.163.4 billion in July. Although the amount was higher than the Rs.67.3 billion agricultural loans disbursed by SCBs in June, it appears quite small when compared to the Ministry of Finance’s claim of banks having sanctioned Kisan Credit Card (KCC) loans worth Rs.269.4 billion during July 1-24, 2020, and an additional Rs.122.6 billion by August 17, 2020.

Net bank credit offtake by the services sector turned positive in July after a gap of three months. During the month, the services sector availed net fresh credit of Rs.187.4 billion after accounting for repayments. Credit disbursal to all services, except for non-banking financial companies (NBFCs) remained positive. Outstanding loan disbursal to NBFCs shrank by Rs.50.6 billion in July, aggravating the cumulative contraction since April to Rs.189.4 billion. Reduced fund requirement of NBFCs due to shrinkage in size of their business, and public sector banks (PSBs) partially meeting this reduced fund requirement through purchase of non-convertible debentures and commercial papers (CPs) of NBFCs under the Partial Credit Guarantee Scheme (PCGS) 2.0 were largely responsible for this shrinkage in outstanding bank credit to NBFCs. PSBs purchased commercial papers and debentures of NBFCs worth Rs.146.7 billion by July 15, 2020, according to Finance Minister Nirmala Sitharaman.

A bulk of the net credit disbursal by SCBs to the services sector was absorbed by the wholesale and the retail trading industry. As the economy started opening up, the wholesale trading industry stepped up its net credit offtake to Rs.125.1 billion in July from Rs.27.6 billion in June. Retail trading industry followed the same path, trebling its net credit offtake to Rs.50.6 billion from Rs.16.3 trillion.

The industry, which had seen a revival in its credit offtake in June, saw its outstanding bank credit contract sharply by Rs.538.9 billion in July. Unlike the first three months of the year, net credit disbursal to micro, small and medium enterprises increased in July, by Rs.83.6 billion. As per the government’s data, banks sanctioned loans worth Rs.298.1 billion to MSMEs under the Emergency Credit Line Guarantee Scheme (ECLGS) during July 1-23, 2020. The huge difference between the government’s claim and the SCB credit disbursal data reported by the RBI could possibly be explained by repayment of debt by MSMEs. The magnitude of implied repayments in July, however, appears quite huge considering that MSMEs were cash strapped and the government had to announce a special scheme to assure adequate funds flow to them.

Outstanding bank credit to large industrial units contracted by Rs.538.9 billion in July 2020. The contraction-was broad-based with 25 out of the 33 sub-industries reporting a fall in outstanding bank credit. Large industrial units did not aggressively tap alternate sources of money either. Issuances of corporate bonds by non-financial companies, in fact, declined to Rs.162.9 billion in July from an average monthly Rs.208.8 billion during April-June 2020. The mobilisation dropped even further to Rs.72.9 billion in August. Similarly, amount garnered through commercial papers declined from an average monthly Rs.1.24 trillion during the June quarter to Rs.913.4 billion in July and further down to Rs.611.5 billion in August.

The case does not seem to be of starvation of funds as banks were flush with deposit money and larger companies are less risky to lend to. Fund requirement by large industrial units is actually seems to have reduced as they put their capex plans on the backburner. Also, their reliance on external sources of funds for working capital is likely to have reduced in July and August as improved topline is expected to have covered non-variable costs better. During the June 2020 quarter, cash profits after tax of nearly 2,000 listed non-finance companies had nearly halved from their year-ago levels.

Going forward, net SCB credit disbursals are expected to remain subdued due to cut in capex plans by large corporates. However, the penetration and spread of bank credit may improve with the RBI including loans to startups and farmers for installation of solar power and setting up compressed bio-gas plants under priority sector lending on September 4, 2020.