Bank credit growth has slowed significantly post-COVID. The slowdown could have been more embarrassing for banks in the absence of the government’s Emergency Credit Line Guarantee Scheme (ECLGS). ECLGS, launched as part of the Atmanirbhar package early this year, has helped the overall bank credit to stay in the positive territory during the COVID crisis.
According to estimates by rating agency CARE, between May and October, overall bank credit has grown by Rs 1.2 lakh crore whereas disbursements under the ECLGS till November 12 alone stood at Rs 1.52 lakh crore.
“The disbursements under ECLGS scheme alone was higher than overall incremental growth in bank credit during this period," said Sanjay Agarwal, senior director at CARE ratings.
In other words, what this means is without the ECLGS, the overall bank credit growth would have been far lower and maybe even in the negative zone this year.
Credit growth to most sectors, particularly industries, has shrunk or was nearly flat this year. This is on account of the COVID impact on economic activities and subdued demand scenario.
Poor credit growth
Credit flow to different sectors has slowed down significantly this year as banks are worried about potential defaults and due to lack of quality demand.
Non-food credit growth in India slowed to 5.8 percent in the 12 months ended September 2020 compared with 8.2 percent in the 12 months prior to that. In absolute terms, total non-food bank credit stood at Rs 91.17 lakh crore as on September 2020 compared with Rs 86.2 lakh crore a year ago.
Bank lending to industry as a segment was recorded ‘nil’ growth in the 12 months ending September 2020, compared with a 2.7 percent growth in the comparable period in the previous year.
Among the industries, loans to large companies contracted by 0.6 percent compared with a growth of 3.4 percent in the previous year. For micro and small companies too, bank lending remained in the negative territory in the 12-month period till September.
Among individual loans, bank lending to education remained in the contraction zone. Loan flow to this segment contracted by 4.5 percent in the 12 months to September compared with a contraction of 1.3 percent in the same period last year.
Bank lending to two key infrastructure segments—power and telecommunications—plummeted in the one year period till September. For the power sector, the loan growth shrank to 0.9 percent from a 4.8 percent growth in the previous year while for telecommunications, the growth slipped to negative 0.2 percent from a growth of 25 percent in last year.
As part of the Atmanirbhar Bharat 3.0 package, the government has extended the emergency credit guarantee scheme till March 31, 2021, and has effectively expanded the scope of the scheme to companies across 26 stressed sectors where loan outstanding is between Rs 50 crore and Rs 500 crore.
Under the ECLGS scheme, companies can get up to 20 percent of their loan outstanding as on February 29 as additional credit. These loans are fully guaranteed by the government and collateral free. Already, under the scheme banks have Rs 2 lakh crore loans to 61 lakh borrowers and disbursed Rs 1.52 lakh crore.
Apart from extending the deadline, the government has also launched an ECLGS 2.0, which lets companies across 26 stressed sectors can get up to 20 percent of their outstanding as on February 29 as additional credit. The repayment period is set at five years.
Will the modified scheme help?
The scope of the scheme has been expanded possibly because most of the demand of the MSME borrowers has been already met, Agarwal said.
“The government wants to extend the benefit to other borrowers as there is not enough demand from the MSME borrowers after Rs 1.52 lakh crore disbursal,” said Agarwal.
The modified ECLGS scheme will help smaller companies and stressed borrowers get much-needed liquidity assistance and avoid immediate defaults. Since the repayment period is set at five years, companies will have enough time to make repayments.
ECGLS Scheme 2.0 for corporate stressed sectors is positive for corporate banks and HFCs, said analysts at Emkay Global, adding the 26 corporate sectors cover 72 percent of the corporate debt (Rs 52 trn as on February 22).
“The extension of the ECGLS scheme to these corporate sectors - mainly real estate, gems/jewelry, traders (wholesale/retail), hotel, restaurants, tourism and logistics - should bring relief to these sectors and reduce the risk of default for lenders, mainly corporate banks, and support credit growth,” Emkay said in a note.
Further, HFCs will be more beneficial here than NBFCs as they can cover it under their existing stress LAP as well as developer finance book. However, other NBFCs will also take an advantage of the same at least for their good clients, Emkay said.
To sum up, the modified ECLGS scheme now covers almost all segments of stressed borrowers. Companies can use this money to stay afloat till growth returns. It’s a face-saver for banks as well to show some credit growth in an otherwise dull credit market.