RBI bulletin: Bank credit flow to industries, infrastructure remains a concern

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Contraction of bank credit to large industries and infrastructure remains a cause of concern, the Reserve Bank of India (RBI) has said in its latest monthly bulletin said. However, credit growth to medium industries has accelerated, pointing to the positive impact of the measures taken by the government and the RBI, the central bank's February bulletin has said.

“The muted credit off take in the recent past needs to be seen in the context of economic slowdown coupled with the COVID-19- induced lockdown,” says the bulletin that publishes articles and data on various aspects of the economy every month.

The bank credit growth, which slowed down in 2019-20, experienced a further setback in 2020-21 in the wake of the COVID-19-induced lockdown but with the gradual resumption of economic activity, credit to agriculture and services sectors accelerated in the recent period, the bulletin said.

Public Sector Banks (PSBs) were primarily responsible for this acceleration. “Empirical estimates indicate that non-food credit is sensitive to interest rate changes with a lag, with the industry and services sectors exhibiting greater sensitivity,” the bulletin said.

The inclusion of non-banking finance companies (NBFCs) in the TLTRO (targeted long-term repo operation) on tap scheme and steps to incentivise credit to MSME entrepreneurs in the monetary policy statement of February 5, 2021, were steps in this direction, the RBI said.

“Credit offtake is expected to pick up as the economy is poised to stage a smart recovery in 2021-22 on the back of the decline in COVID infections and swift rollout of the vaccination programme in addition to a number of measures announced by the government in the Union Budget 2021-22 to accelerate the growth momentum,” the bulletin said.

Large industries constituted around 82 percent of the credit offtake to the industrial sector, the micro, small and medium enterprises accounted for the rest in November 2020.

Credit to the industrial sector has generally remained weak in the recent years. A peak of 6.9 percent was achieved in April 2019 but there has been a continuous decline since then with credit growth turning negative in October 2020.

“The recent decline in credit growth was mainly due to large industries. Owing to the stressed assets in large industries, there was a general reluctance on the part of bankers to lend to these industries, with the problem getting compounded by the pandemic,” the RBI bulletin said.

Though it turned negative for large industries in November 2020, the silver lining was the robust growth of credit to medium industries, the RBI said.

Credit to micro and small industries registered a moderate increase between November 2019 and November 2020. The contraction in credit extended by PSBs to the industrial sector started in December 2019 and continued unabated in 2020. Industrial credit growth by private sector banks was mostly in double digit till June 2020.

However, it has fallen sharply since then, touching a low of 4.3 percent in November 2020. With the Indian economy poised to recover in 2021 and beyond, a turnaround in credit offtake to the industrial sector is expected, the RBI bulletin said.

For the services sector, credit growth was robust in 2018-19 but lost pace in 2019-20. Unlike the sharp moderation in industrial credit and personal loans due to the pandemic, credit growth to the services sector bucked the downtrend and posted an accelerated growth. This acceleration was primarily due to “transport operators” and “trade”, the RBI said.

Lending to NBFCs slows

The credit growth extended by banks to NBFCs moderated in the last decade and almost halved in 2017-18 compared to 2007-08, the RBI Bulletin said.

Credit growth to this sector declined substantially from November 2016, though the sector witnessed an uptick in 2018-19. The credit growth extended by the scheduled commercial banks (SCBs) to the sector moderated in 2019-20 due to the liquidity stress and rating downgrades faced by the NBFCs in the aftermath of the Infrastructure Leasing and Financial Services (IL&FS) crisis in August 2018, with banks turning cautious.

“Consequently, NBFC sector witnessed a decelerated credit growth in March 2020. The lockdown compounded the slowdown, with credit growth to this sector further decelerating in November 2020,” the RBI Bulletin said.

It noted that the RBI took a number of steps to address the liquidity issue, including recent introduction of TLTROs aimed at liquidity support to NBFCs, especially smaller ones, and micro-finance institutions (MFIs).

The inclusion of NBFCs in TLTRO on tap scheme on February 5, 2021 would facilitate lending to various sectors of the economy, the RBI said.