Fresh bank credit dives 64% in FY20

MUMBAI: Banks gave out fresh credit, through bonds and loans, of only Rs 6 lakh crore in FY20 — a drop of 64% from Rs 16.8 lakh crore that they handed out to borrowers in FY19. Bank loans shrank due to an economic slowdown, deleveraging by corporates coupled with the fact that lenders were closed for business for the last week of March, which is their busiest week in any year.
According to data released by the Reserve Bank of India (RBI), there has been a sharp drop in bank investment in non-government debt, which has accentuated the slowdown in the flow of resources to the corporate sector.Banks ended FY20 with outstanding loans of Rs 103 lakh crore, which is an increase of only 5.8% over Rs 97.26 lakh crore in the previous year.
If deposit growth was low, the growth in corporate bond investments was equally sluggish at 5% with the value of outstanding investments at Rs 32.2 lakh crore. Investment in commercial papers declined 28% to Rs 3.45 lakh crore.
“The sharp decline in incremental credit during FY2020 was driven by slowing economic growth as well as heightened risk-aversion among lenders,” said ICRA group head (financial sector ratings) Karthik Srinivasan. Also, corporates and non-banking finance companies have replaced some of their domestic loans with external borrowings (ECBs).

Approvals of ECBs rose 70% year-on-year as of February 2020 and stood at $58.2 billion compared to $34.2 billion in the 12 months ending February 2019. The break-up of bank credit into sectors shows that up to end February 2020, loans to the metals segment have shrunk while personal loans have driven bank credit.
According to Srinivasan, bank credit would rise faster in FY20. “The expectations of an 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,” he said. The capitalisation of interest for the period of moratorium offered by lenders during the lockdown would also increase outstanding loans.
ICRA has said that incremental credit flow from banks, through commercial papers (CPs) and corporate bonds outstanding could rise by Rs 7.3-9.7 lakh crore during FY21. This will be a sequential growth of 22-61% over FY20, albeit on a low base of Rs 6 lakh crore. Another driver of bank credit during the current year could be the lower reliance on external borrowing coupled with the RBI providing banks cheap refinance through targeted long-term repo operations to invest in corporate bonds.