Credit growth to industry remained in the negative territory during all the four quarters of FY21, the Reserve Bank of India (RBI) said in a quarterly report on June 29. A decline in private consumption and investments by companies during the first year of the COVID pandemic and a shift to the markets for fund-raising may have led to a decline in loan growth by companies.
“Working capital loans in the form of cash credit, overdraft and demand loans, which accounted for a third of total credit, contracted during 2020-21,” the central bank said in a release. Growth in credit to the private corporate sector declined for the sixth successive quarter in January-March 2021 and its share in total credit stood at 28.3 percent.
Overall credit growth was supported by personal loans, or loans to individuals, which recorded a 13.5 percent growth year-on-year (y-o-y) in March 2021. Credit to the household sector rose by 10.9 percent y-o-y and its share in total credit increased to 52.6 per cent in March 2021 from 49.8 percent a year ago.
Analysts have also pointed out that the slowdown in loan growth in FY21 was led by a tendency among companies to deleverage, or reduce the debt they carry on their books. “We believe such low credit growth was a direct fallout of corporates rapidly deleveraging by repaying high cost loans through funds raised through bond issuances,” Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said in a report earlier this month.
An analysis by SBI’s economic research wing showed that the top 15 sectors reported more than Rs 1.7 lakh crore of debt reduction in the pandemic year 2021. Refineries, steel, fertilisers, mining and mineral products, and textiles alone reduced debt by more than Rs 1.5 lakh crore during FY21.
“Simultaneously, primary issuance of bonds increased by nine percent. This trend is continuing in FY22 also,” Ghosh said.
With companies increasingly shifting to the bond markets for raising money rather than tapping into bank loans, bankers have begun to insist on their loan books being seen in conjunction with their investment portfolios. They are also betting on foreign fund flows into Indian markets slowing in order to bring corporates back to loans.
“Now that in the West practically all the economies have vaccinated themselves well, I expect that there will be huge growth opportunities there. So, perhaps some money which used to flow in here may not be available,” said SBI chairman Dinesh Khara on May 21. As liquidity in the system moderates, corporates might come back to the banking system for drawing funds, Khara added.