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Lending to companies unlikely to see a revival anytime soon after shocking collapse

Flow of credit to the commercial sector by banks and NBFCs has fallen 88 per cent in the two quarters April to September.

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New Delhi: Lending to companies by banks and non-bank financial institutions has fallen sharply in the first six months of the current financial year and is unlikely to revive in the near future despite numerous steps announced by the government and the Reserve Bank of India (RBI).

Data with the RBI shows that flow of credit to the commercial sector fell 88 per cent in the April-September period as compared to the corresponding year ago period.

The contraction in lending has been across both banks and domestic non-banking finance companies, data shows. The flow of credit from banks to the commercial sector was negative at Rs 1.28 lakh crore in the first half of 2019-20 as against a growth of Rs 1.85 lakh crore in the year ago period.

NBFC lending also tells a similar story with flow of funds at a negative Rs 1.25 lakh crore in the April-June quarter as against a positive flow of Rs 41,200 crore in the year-ago period.

Graphic by Soham Sen | ThePrint
Graphic by Soham Sen | ThePrint

Weak demand

Lack of demand from companies and reluctance in lending to the corporate sector by banks have been the main reason for the near halt of lending to the commercial sector. Along with the weak demand, companies are also preferring to borrow overseas through the external commercial borrowings route, RBI data shows. Flow of funds to the commercial sector through external commercial borrowings was at Rs 54,073 crore as against a negative Rs 653 crore.

RBI attributed the muted credit growth to both “low momentum and unfavourable base effects”.

“The seasonal decline in credit during Q1:2019-20 was more pronounced than in the corresponding quarter of the previous year. The offtake during Q2 (up to mid-September) has been subdued as compared with the corresponding quarter of the previous two years,” it pointed out, adding that the credit growth to industry moderated in the last four months after accelerating continuously between August 2018 and April 2019, while credit growth to services decelerated sharply since January 2019.


Also read: How the Modi govt can stabilise India’s crisis-hit NBFCs


Outlook bleak

The situation is unlikely to improve in the near future if one goes by the industrial outlook survey conducted by the RBI. Manufacturing firms polled in the July-September 2019 round of the survey reinforced the bleak outlook for the December-ended quarter.

“Sentiment in the manufacturing sector polled in the July-September 2019 round of the Reserve Bank’s IOS dipped for the quarter ahead, reflecting moderation in expected production, order inflows, capacity utilisation, employment conditions and exports,” RBI said.

The 1.35 percentage points cut in the monetary policy rates since February this year is also likely to take some time to favourably impact the growth rates. In an analyst call after the monetary policy committee meeting last week, responding to a question of the impact of the rate cuts, RBI Executive Director Michael Patra cited an in-house working paper to state that “rate change takes action in two quarters and reaches its peak impact on output in three to four quarters..”

Economists expect overall economic activity to revive only in 2020-21 when a pick-up in consumption revives investment activity.

“Bank credit has slowed down and there are two reasons for this. There is not enough demand from companies and on top of that there is an unwillingness to lend by banks to companies. Banks now prefer retail lending where the ticket sizes of loan are small. The lending by non-banking finance companies has also slowed down,” said Madan Sabnavis, Chief Economist at Care ratings.

“Going ahead, recovery of bank credit will depend on the outcome of the festive season. Capacity utilisation has been down and not many new projects are coming up. There could be a slight pick-up in the second half of the year if festive season sales pick up but overall recovery will take time. The impact of the measures announced by the government and RBI will be limited in the short-term,” he added.


Also read: We have turned the corner on NBFC & real estate crises, IndusInd Bank CEO Sobti says


 

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