Economy blues: Credit flows slow as economy remains in slowdown mode and bankers stay cautious

The flow of credit continues to decelerate as the economy remains in slowdown mode and bankers stay cautious. While non-food loans grew at just 5.2% year-on-year in the last fortnight of July, the lowest levels seen since March 2017, the value of corporate bonds issued in July, at Rs 49,013 crore, was the smallest in at least 10 months. The value of commercial paper (CP) — a short-term borrowing instrument for companies —floated in July was the smallest in many months at Rs 91,338 crore. Since April, non-food credit has contracted by 1.3% with the outstanding levels down at Rs 101.87 lakh crore, data released by the Reserve Bank of India (RBI) shows.

Bankers appear to be participating actively in the corporate bond markets. Close to Rs 80,000 core was raised by companies in April which was not very much smaller than the Rs 85, 000 crore mopped up in February. State Bank of India (SBI) chairman Rajnish Kumar recently observed the investments made in corporate bonds needed to be considered while assesing the flow of credit. “When it comes to credit growth, we also cannot ignore the investments made in the corporate bond market…If we take all of this together, our growth would have been about 10%,” Kumar observed. The lender has moderated its loan growth expectation for the year FY21 to 8% from over 10% earlier.

With deposits in full flow, the large surpluses with banks are finding their way into risk-free paper ; closeto Rs 4 lakh crore of G-Secs, T-Bills and SDLs were issued in July. Deposits with banks stood at Rs 141.62 lakh crore as on July 31, up 11% y-o-y and at an all-time high.

The average yield on G-Secs, in the primary market slipped to 5.65% in July from 5.8% in June but banks do not seem prefer sovereign paper to corporate credit.

Dipak Gupta,Joint MD, Kotak Mahindra Bank recently admitted the lender has been going slow on fresh loans. “We have not increased our book significantly. We have done a lot more of treasury investments where the yields are lower but are safer. So, while you see that the balance sheet has grown, it has come largely from safe treasury investments,” Gupta said. Banks have also been stashing away large sums in the RBI’s reverse repo window at just 3.35%.

Sujan Hajra, chief economist at Anand Rathi Share and Stock Brokers, said RBI’s liquidity infusion and the government’s credit guarantee scheme are yet to reflect in bank credit expansion. “Banks are parking money either in excess SLRs which is now around Rs 16 lakh crore or in the LAF window. While lower economic activity is a major drag on credit growth, banks, too, remain risk-averse to lend to lower-rated entities,” Hajra wrote. The loan restructuring scheme may be the next trigger to stimulate growth, he added.