Credit concerns

(Mains Examination : General Studies Paper :3 - Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment.)

Context

The Reserve Bank of India, in its report “Sectoral deployment of bank credit in India”  has highlighted the sharp decline in bank credit to parts of the economy.

 Reasons for the decline  in bank credit

• The collapse is due to both supply and demand-side factors as the pandemic has forced both borrowers and lenders to tread warily.
• In the first half of the year, demand for credit remained muted as economic activity was restricted due to the lockdowns.
• Subsequently, even though economic activity has rebounded, appetite remains subdued, as there is considerable uncertainty over the medium-term growth outlook.
• On the supply side, there is “a general reluctance on the part of bankers to lend” to large industries owing to stressed assets.
• This decline in credit to large industries, and the infrastructure segment, is a matter of concern.         

The statistics showing slowdown

• Bank credit, which grew at a healthy pace in 2018-19, had slowed down even prior to the pandemic in 2019-20.
• GDP growth had slowed down from 6.1 per cent 2018-19 to 4 per cent in 2019-20.
• At the aggregate level, non-food credit growth was 6.1 per cent in March 2020, as compared to 13.4 per cent a year ago.
• Growth slid further to 5.9 per cent in November 2020, down from 7.8 per cent a year ago.
• This decline is due to large industries as their share in the incremental credit flow was actually negative in the year ending November 2020.
• Retail credit (personal loans) and loans extended to the services sector accounted for the bulk of the lending during this period, highlighting the risk aversion of banks.
• The only bright spot is the rise in lending to medium-sized industries because of policy measures such as the emergency credit line guarantee scheme (ECLGS) which aimed to provide credit to MSMEs.         

Rising NPA

• The economic shock from the pandemic will add greater pressure to bank balance sheets.
• The central bank now expects banks’ bad loans to rise to 13.5 per cent by September 2021, up from 7.5 per cent in September 2020 in its baseline scenario
• Under more severe conditions, this may deteriorate to almost 15 per cent-underscoring the need to build adequate capital buffers to withstand this shock.         

Conclusion

Banks will have to build capital buffers to withstand Covid shock which will be crucial not only to ensure credit flow but also to build resilience in the financial system.