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Amid feeble credit offtake due to local lockdowns this year, lenders sanction Rs 6,000-crore line of credit to SII
Commercial banks are rushing to coronavirus vaccine manufacturers to offer them funds after the Reserve Bank of India (RBI) opened a liquidity tap of Rs 50,000 crore last week, which is available ‘on-tap’ for the lenders for on-lending to the healthcare sector.
According to banking industry sources, a host of commercial banks – both public sector and private sector – have sanctioned a line of credit to the tune of Rs 6,000 crore to Pune-based Serum Institute of India (SII) – the largest vaccine producer of the world, which is manufacturing Covishield vaccine. Sources indicate that SII has drawn Rs 1,200 crore from the amount that was sanctioned. A banker also said that a Rs 1,000-crore line of credit has been sanctioned for Bharat Biotech as well, the Hyderabad-based manufacturer of Covaxin.
The central bank has sweetened this on-tap liquidity facility by allowing banks to classify such loans as under priority sector lending. Banks have to lend 40% of their total lending to sectors that are classified under priority sector. Banks will get loans from this window at repo rate which is at 4%, till March 31, 2022.
Under the scheme, banks can provide fresh lending support to a wide range of entities including vaccine manufacturers, importers/suppliers of vaccine and priority medical devices, hospitals, pathology labs and diagnostic centres, manufacturers and suppliers of oxygen and ventilators among others.
Banks have been asked by the regulator to create a COVID loan book. The deal was further sweetened as banks will be eligible to park their surplus liquidity up to the size of the COVID loan book with the RBI under the reverse repo window at a rate that is 25 bps lower than the repo rate – a move that is seen as margin accretive.
While bankers said the companies in the healthcare sector are one of the best customers at this moment but at the same time these are cash rich companies, hence they may not need that much of funding. The government had released Rs 3,000 crore to SII and Rs 1,500 crore to Bharat Biotech last month towards vaccine supplies.
“The line of credit is like a pre-approved loan. We don’t know how much the company will draw from it,” said a senior official from a large public sector bank.
“These are cash rich companies, we do not know whether they will need the funds,” said the chief executive officer of another public sector bank.
At a time when bank credit growth remained anemic, this RBI line of credit comes as a huge opportunity for the lenders to grow their business.
In the last financial year, credit growth of commercial banks was 5.6% year-on-year as compared to 6.1% in the previous year. A recent RBI report termed the credit growth “feeble” while pointing to continuing risk aversion among banks amidst pandemic linked impairment to their balance sheets. Commercial banks invested more in government securities than extending loans in the previous financial year – a phenomenon not seen in almost two decades barring 2016 – the year of demonetisation.
“The RBI’s liquidity window is more for the healthcare sector than banks. Banks will benefit but not to a great extent,” said Siddharth Purohit, an analyst with broking firm SMC Global. He said the retail loans, like mortgages and automobiles, have also slowed down following this year’s lockdown. Many states have imposed curbs after the second wave of Covid-19 pandemic hit India this year. During last year’s lockdown the impact on the retail credit was limited.
“We estimate that the severely affected states account for about 48% of retail credit and about 56% of overall credit as well,” Emkay Global, another broking firm, said in a note to its clients.
“Again, self-employed categories will bear the biggest brunt of localized lockdowns. We estimate that within retail assets (31% of overall credit), the self-employed category accounts for nearly a third. Combined, banking credit could moderate by about 159 bps to 9.3% in FY22. NBFC credit will similarly slow by 140 bps to 12.8%. Do note that we are assuming negligible impact on corporate demand – but even micro-lockdowns extending beyond a few months can eventually end up impacting demand,” the report said.
Latest RBI data shows bank credit contracted by Rs 89,000 crore in the current financial year, till April 23 as compared to Rs 97,445 crore contraction in the comparable period of the last financial year.