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Bank credit stutter as corporates turn to bonds, NBFCs for cheaper funds

March 28, 2017 / 02:29 PM IST

Non-bank funding sources have pushed bank credit growth to about one-third of deposit growth rate in the fortnight ending March 3.

The growth in the bank loans stood substantially low at 4.1 percent as compared to deposits growth of 12.7 percent, the Reserve Bank of India data showed.

The decline in bank loans has been largely caused owing to companies borrowing money from non-banking sources such as bonds, equities and NBFCs (non-banking financial companies) which offer a lower rate of interest currently.

Even as bank credit has always been a powerful indicator of the economic activity in our country, in recent years, the link between credit growth and the pace of economic growth has been gradually on the decline. Credit growth, which grew at 2.5 to 3 times the real GDP growth in the past, is down to 1.2 to 1.4 times over the past two years.

Although there is limited demand from major corporates, a section of the higher-rated borrowers are seeking capital for growth. Banks including public sector lenders and a few private peers have seen a reduction in its appetite to lend with a sharp increase in bad loans.


On the other hand, the Indian bond market has been an attractive source of funding for companies for about 2 years now and buzzing with new issuances, offering corporates — at least the higher rated ones — a good alternative source for raising cheaper money. In fact, banks too have been participants in the bond markets buying corporate bonds.

Reports suggest that the share of the bond market has risen to 33 percent from 22 percent a year ago, while bank credit share stands at 22 percent.

Bond issuances so far in 2016-17 have touched Rs 5.5 lakh crore, growing over 21 percent and second consecutive year that it has surpassed bank credit disbursements which stand at about Rs 3.1 lakh crore so far.

Additionally, NBFCs have captured a significant market share tapping the credit segment which was largely untouched by the banks.

Over the past three years, NBFCs have gained some market share in the origination of retail credit lending, on the back of the quicker services and faster growth.

Data shows that even as bank credit growth slipped from 17 percent levels in the 2012 fiscal to 14 percent in the following two years and further to 8-9 percent levels in FY15 and FY16 and now sub 5 percent, the annual loan growth for NBFCs has been steady in the 17-19 percent range over this period.

Moreover, many fintech players entering with hopes of huge opportunities substituting the roles of traditional roles of banks could illustrate a different view about the lending industry.

All this may seem to have contributed to the government’s optimism on India’s GDP growth rate which is pegged at 7.1 percent despite abysmally low credit growth and demonetisation impact on the economy.

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