Has COVID-19 hit bank lending? RBI data shows steep contraction

An analysis of the latest bank credit growth data from the Reserve Bank of India (RBI) shows a steep contraction in many segments in the current financial year up to June. Loans to industry, especially to the small and medium-sized companies have dropped sharply.

While large companies with good ratings have managed by accessing money markets and negotiating with lenders, smaller ones with no bargaining power have suffered a blow.

This year so far, bank lending to medium-sized industries contracted by a whopping 9.4 percent while that to micro and small sector contracted by 7.6 percent, the RBI data showed.

Growth in bank lending to larger companies was nearly flat at 0.4 percent.

The data isn’t surprising though.

COVID-19 has hit the economy hard. Consumer demand has collapsed affecting all sectors. Small businesses that lack deep pockets have suffered the most. Beginning last week of March, when the lockdown began, economic activities have slowed substantially. The GDP growth is expected to contract this fiscal year by up to 9 percent. The state of the battered economy reflects in bank lending figures.

"Credit growth is likely to remain low in the foreseeable future. Private banks have clearly said they will be cautious in fresh lending. They may preserve capital rather than aggressive credit push. Whatever growth will happen, will happen in PSBs which are flush with liquidity," said Siddharth Purohit, an analyst at SMC Global Securities.

Services sector

The services sector too has been hit hard with the loan growth contracting by 2.6 percent so far in the current financial year. Credit growth from much of the services sectors including transport, shipping and hotels, has been flat or negative.

Remember, on a year-on-year basis, bank loans to the services sector had grown by 10.7 percent.  The growth in bank lending to the tourism sector was 17 percent on a YoY basis, which has now plummeted to 0.6 percent.

Personal loans

Typically, personal loans defy the slowdown trend. These are relatively small-ticket loans and are drawn by salaried people. However, a COVID-hit economy didn’t spare even consumer loans. Bank lending to personal loans has contracted by 2.5 percent this year compared with a YoY growth of 10.5 percent.

The general demand slump hit all segments of personal loans badly. To give a break-up, growth to consumer durable loans contracted by 5 percent this fiscal year so far (as against a YoY growth of 53 percent). Loan growth to housing, education and vehicle loans too contracted by 0.2 percent, 1.1 percent and 2.7 percent, respectively.

RBI rains liquidity, banks say No

To prod banks to lend to industries, the RBI announced several schemes to infuse liquidity into the banking system through multiple rounds of long-term repo operations, besides cutting the key lending rate, repo, by a cumulative 115 basis points in the COVID season.

The total amount of liquidity infused into the system could be in the range of Rs 8 lakh to Rs 9 lakh crore under various scheme s. But, none of these measures has helped to boost credit growth as banks have remained risk-averse. They fear future NPAs. Banks, already sitting on about Rs 9 lakh crore NPAs are reluctant to add to their bad loans by taking risky exposure.

MSME loan scheme saves the day

The reason why bank lending to MSMEs has not come to a complete halt is government’s Rs 3 lakh crore MSME loan scheme. Banks, mainly PSBs, did some hard work to push credit to MSMEs even in the poor demand scenario. Many MSMEs were offered loans even though they didn’t really require it to meet targets, according to bankers.

As on August 3, banks sanctioned Rs 1.37 lakh crore MSME loan scheme under which Rs 92,000 crore has already been disbursed. That is still nearly half of the Rs 3 lakh crore target set by the government under the Rs 20 lakh crore COVID relief package. However, this scheme has helped in the context of the muted credit growth scenario.

Under the scheme, the government offers a guarantee on loans. Existing borrowers can draw an additional 20 percent of the outstanding loan amount as on February 29. Recently, the government had expanded the scope of its loan guarantee scheme by including loans given to professionals like doctors, lawyers and chartered accountants for business purposes as well as to firms with a turnover of Rs 250 crore.

Bank credit growth trends indicate the true state of the economy. It is a function of demand and supply. Right now, the signals aren’t very encouraging.