DISMAL CREDIT PORTFOLIO

In its study on the “sectoral deployment of bank credit in India”, the Reserve Bank of India has highlighted a sharp decline in bank credit. It is mainly due to both supply and demand-side factors — the pandemic has forced both borrowers and lenders to tread warily. In the first half of the year, demand for credit remained restricted as economic activities were restricted due to lockdowns. Subsequently, even though economic activities have rebounded, demand remains subdued, as there is considerable uncertainty over the medium-term growth outlook. On the supply side, as the report notes, there is “a general reluctance on the part of bankers to lend” to large industries due to stressed assets. This decline in credit to large industries and the infrastructure segment is a matter of concern. Bank credit, which grew at a healthy rate in 2018-19, had slowed down even before the pandemic 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, the report notes. This decline is partly due to large industries — their share in the incremental credit flow was actually negative in the year ending November 2020. Retail credit such as 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 — this could be on account of policy measures such as the emergency credit line guarantee scheme (ECLGS) which aimed to provide credit to MSMEs. The economic shock from the pandemic will add greater pressure to banks’ 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. Under more severe conditions, this may deteriorate to almost 15 per cent — reflecting the need to build adequate capital buffers to withstand this shock.

.... KHOKAN DAS, KOLKATA via email