Bad news is pouring in from everywhere. The stocks are struggling on the Dalal Steet. The rupee value is fast depreciating and the GDP growth is under threat to plunge into a multi-year low. All because of the global coronavirus pandemic, which is pushing the world into a recession.
The Indian economy may have been the fastest growing in the world, it was not on a strong footing because of its own man-made problems. There was disruption from the Yes Bank debacle, IL&FS failure, bankruptcy code, implementation of the GST, demonetisation of higher currency notes, RERA and what not. While bank credit growth was struggling, there was some optimism that the cycle would revise.
But now comes the bad news. The Reserve Bank of India (RBI) in its monetary policy report has said that the banks' credit growth has almost halved to 6.1 per cent in 2019-20 from a level of 14.4 per cent last year. The growth is the lowest in half a century. "Both low momentum and unfavourable base effects were at work," blames the RBI.
The Rs 166-lakh-crore assets size banking industry has a loan portfolio of around Rs 100 lakh crore. In fact, unlike global markets, banks are the key source of funding for the corporate sector in India.
Clearly, the credit growth has been a challenge because of low economic activity in the domestic market and low growth globally. The credit growth was driven purely by the retail engine for the last five years with hardly any demand from the corporate sector. Within retail, unsecured segment was growing at the highest rate, which is unsustainable in the long run.
The RBI says that "the credit growth is likely to remain modest, reflecting weak demand and risk aversion". In fact, risk aversion is something that will play out in the coming years. The COVID-19 spread has already hit hard many companies and the supply chains. The focus of the companies is on preserving cashflows, put a check on costs and also reinvent the model to avoid any possible disruptions in future.
The investors like mutual funds, insurance companies and HNIs are becoming risk averse as there are issues in credit going to the needy especially not so strong NBFCs and MSMEs etc. While the RBI has created huge liquidity for the banking system, the question is whether this liquidity is flowing to the industry or NBFCs, which play a key role in the intermediation.
The RBI says that the credit growth to beverages and tobacco showed a good growth but sectors such as chemicals, cement, construction, infrastructure, metals, textiles, engineering and food processing have contracted.
The report also states that the slowdown in credit growth was spread across all bank groups, especially private sector banks. The private banks are also stabilising as they have seen a change in leadership, new strategic shift on profitability and sustainability and a focus on consumer loan and high investment grade corporate sector.