KOLKATA: The Indian credit market seems to be in a curious conundrum nowadays. The Banking sector had, under Government direction, come up with an emergency credit line to help companies bridge their revenue gap during this COVID-19 pandemic. But, now they are reporting that there are not many takers even for these COVID-19 credit lines which the government wants banks to aggressively push under guarantees of reimbursement. But experts are saying that may very well be the case as lenders are trying to push credit to the businesses that are in a fairly good shape over the firms which are financially struggling during this lockdown imposed by our government.
Despite that, to push credit growth under pressure from the government, banks are now unilaterally sanctioning enhancements to borrowers’ credit limits, even as they lie unused. The lack of demand for credit has been leading banks to park huge amounts under the Reserve Bank of India’s (RBI) reverse repo window, going up to as much as ₹8.42 Lakh Crore on Monday. Officials have said that this is without any doubt the largest single-day amount stored in the central bank.
Whatever demand is there, is primarily from small businesses which are finding it difficult to pay staff salaries and meet fixed costs, in these times of crisis. “It is the small businesses, like a supplier to large manufacturers, that needs the COVID-19 emergency credit lines. The working capital cycle of these small borrowers have been hit because of payment delays by their big customers during the lockdown,” said an anonymous banker.
Public-sector banks (PSBs) such as State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Canara Bank, Union Bank of India and Bank of India (BoI) had launched these special credit facilities successively since late March soon after the nationwide lockdown began. But, these were mostly limited to 10% of the borrowers’ fund-based working capital limit.
Bankers are predictably turning risk averse and the banking sector is content keeping money with the Reserve Bank of India (RBI) even at 3.75% repo rates, during this crisis. Hence, small-scale businesses have been finding it difficult to access institutional credit with most banks.
Furthermore, there is no certainty about when economic activity will resume fully post-lockdown and bigger borrowers are still able to sustain with their resources. So understandably businesses aren’t of the disposition to borrow right now. A senior executive with a large PSB said, “Even though emergency lines are available, borrowers are not willing to take money because they want to wait for things to start. So, there are not many takers for emergency credit lines as of now. Once everything opens, there may be a pick-up in demand.”
Currently, there exists a gap in the market in supply of goods and services, essential to curb the spread of coronavirus. Between 13 March and 10 April, non-food credit grew by 2%. However, for the full year of FY20, credit growth stood at 7.6% and was led by large corporates and non-banking financial companies (NBFCs). This was before the onset of the COVID-19 lockdown and closure of factories that led to credit demand from large businesses, dropping.
Consequentially, manufacturing firms have been telling banks that they are currently sitting on stock for a couple of months and their vendors are unable to make any commitments about the stock they want to take up. Barring essential goods and services, there is no consumer demand for anything at present and that is holding back credit growth.
“Given that the growth outlook in this lockdown scenario remains challenging, focus is on asset quality, liquidity and capital adequacy,” said a note by Centrum Institutional Research on 5 May.
However, the pressure from the government to push loans is increasing. In turn, banks are pushing creditors to send emails and get the 10% extra credit line approved, even if they do not plan to use it, said an aforementioned banker. “We have to show that the bank has sanctioned credit in the form of COVID-19 credit lines. So, we are calling up borrowers and trying to convince them to avail of this credit line. It does not necessarily mean they have to use it and an emailed confirmation is sufficient to extend this line. The bank does not need to portray utilisation of the funds, a mere disbursement is satisfactory,” added the banker.
Meanwhile, RBI’s had plans, to dissuade lenders from using the reverse repo window to park the excess liquidity that it had pumped in, for the most part. But, this plan of decreasing the reverse repo rate by 90 basis points (100 basis points = 1%) has not made any dents so far.
On the contrary, banks have increased their participation in the reverse repo auctions, depositing even more money with the central bank. The reverse repo is the rate at which RBI borrows from commercial banks and is an important monetary policy tool aimed at controlling system liquidity.
Credit availing remained on a downward slope throughout FY20 and the spread of the coronavirus has ensured the trend continues, well into FY21. On Tuesday, rating agency ICRA said the incremental credit flow from bank credit, bonds outstanding and commercial paper during FY20 declined by 64% to ₹6 Lakh Crore from ₹16.79 Lakh Crore during FY19.
Karthik Srinivasan, ICRA group head (financial sector ratings) said the sharp decline in incremental credit during FY20 was driven by slowing economic growth as well as heightened risk aversion among lenders. “Nonetheless, the expectations of increase in incremental credit flow during FY21 is driven by increased credit demand amid weakening cash flows of borrowers because of Covid-19 induced stress; as well as capitalisation of interest for the period of moratorium offered by lenders,” Srinivasan said, adding, “Lower external commercial borrowings (ECB) coupled with TLTROs (targeted long-term repo operations) could also drive up the domestic credit growth.”