While bank credit numbers have been weak in FY19, broader data released by the Reserve Bank of India (RBI) shows that financing of business shrunk 87% in FY20 up to mid-September. The numbers indicate that the slowdown is more intense than earlier estimated and explains the RBI’s decision to slash its growth forecast from 6.9% to 6.1%.
The total funds flow in FY19 (up to mid-September) to businesses from banks, capital markets and non-bank lenders stood at nearly Rs 7.4 lakh crore. This number shrunk to Rs 90,995 crore in FY20 in the same period (see graphic).
A large chunk of this difference comes from the Rs 3.1-lakh-crore drop in bank credit growth. As against last year’s credit growth of Rs 1.85 lakh crore, banks’ lending went into the negative region by Rs 1.28 lakh crore in the first half this year. The second big drop is in the flow from non-banks, which fell Rs 3.3 lakh crore from Rs 5.5 lakh crore to Rs 2.2 lakh crore. This drop was because finance companies and mutual funds did not invest in commercial papers (CPs) and other debt issued by businesses.
“The slowdown in credit growth was led by public sector banks and private sector banks, while credit growth of foreign banks continued to be modest, despite some uptick in the recent period,” the RBI said in its monetary policy report.
While credit growth to agriculture and personal loans remained broadly unchanged in the last one year, credit growth to industry moderated in the last four months after accelerating continuously between August 2018 and April 2019. Credit growth to services has decelerated sharply since January 2019.
For banks, it is personal loans that have been the only drivers of credit. Within personal loans, credit offtake has been broadly concentrated in two segments — housing and credit card outstanding. Within industry, credit growth to beverages & tobacco, cement, engineering, vehicles, construction & power, telecommunications and roads in the infra segment accelerated.
Risk-averse banks are choosing to put their money in government bonds. Banks’ holding of government in excess of the statutory requirement stood at 6.9% of deposits, up from 6.3% as of end-March 2019. Among domestic non-bank sources of funding, public issues of equity and private placement increased significantly.
According to CARE chief economist Madan Sabnavis, weakness in demand is unlikely to see a turnaround. In turn, investments too are unlikely to see a pick-up in the near term despite the various government measures. Lower demand conditions would limit imports, while exports would continue to be constrained by weakness in global demand and trade dispute. “We have revised downward our outlook for the growth of the domestic economy to 6.2% for 2019-20 from 6.4-6.5% earlier,” said Sabnavis.
CARE forecasts an improvement in economic activity in the last two quarters of the fiscal year (Q3 and Q4) aided by a limited pick-up in demand, partially aided by festive demand in general and more specifically rural spending from a good harvest.