Bank credit growth to the industrial sector decelerated 0.8% year-to-date as of May 21, 2021, due to poor loan offtake from the corporate sector.
It slowed the non-food credit growth to 5.9 per cent in May 2021, as compared to 6.1 per cent in the year-ago month, RBI data showed.
On the other hand, personal loans registered an accelerated growth of 12.4 per cent in May 2021, as compared to 10.6 per cent a year ago, primarily due to accelerated growth in vehicle loans and credit card outstanding.
What’s up?
Corporates are preferring to deleverage debt and waiting it out for the pandemic to end before committing any new capital expenditure. They are retiring high-cost bank loans by tapping the bond markets where funds are available for cheaper rates.
Banks anticipate a loan demand surge from retail as the pandemic ebbs in the year ahead. However, the corporate loan demand is not yet on horizon.
Loans to industry
Loans to industries were 1.7% higher on year as of May 22, 2020, according to data on sectoral deployment of bank loans in May released by the Reserve Bank of India.
The RBI said that the fall in loans extended to industries was mainly because credit to large industries contracted by 1.7% compared to a growth of 2.8% a year ago.
However, credit to medium industries registered a robust growth of 45.8% compared to 5.3% in the previous year, and those to micro and small industries registered a growth of 5.0% versus a contraction of 3.4%.
Within the industrial sector, mining and quarrying, food processing, textiles, gems and jewellery, wood and wood products, paper and paper products, glass and glassware, infrastructure, leather and leather products, rubber, as well as plastic and plastic products registered higher growth in May.
On the other hand, credit to beverages and tobacco, petroleum coal products and nuclear fuels, vehicles, vehicle parts and transport equipment, basic metal and metal products, cement and cement products, all engineering, chemicals and chemical products and construction decelerated, RBI said in a release.
Fiscal 2021
Growth in credit to the private corporate sector, however, declined for the sixth successive quarter in the fourth quarter of the last fiscal and its share in total credit stood at 28.3 per cent. RBI said the weighted average lending rate (WALR) on outstanding credit has moderated by 91 basis points during 2020-21, including a decline of 21 basis points in Q4.
Overall credit growth in India slowed down in FY21 to 5.6 per cent from 6.4 per cent in FY20 as the economy was hit hard by Covid. and subsequent lockdowns.
Credit growth to the industrial sector remained in the negative territory during 2020-21, mainly due to the COVID-19 pandemic and resultant lockdowns. Industrial loan growth, on the other hand, remained negative during all quarters of 2020-21.”
The RBI further said working capital loans in the form of cash credit, overdraft and demand loans, which accounted for a third of total credit, contracted during 2020-21, indicating the impact of the coronavirus pandemic.
Shift to bonds
The corporate world focused on deleveraging high-cost loans through fundraising via bond issuances despite interest rates at an all-time low. This has led to muted credit growth for banks.
Corporates raised Rs 2.1 lakh crore in December ended quarter and Rs 3.1 lakh crore in the fourth quarter from the corporate bond markets. In contrast, the corresponding year-ago figures were Rs 1.5 lakh crore and Rs 1.9 lakh crore, respectively.
Bonds were mostly raised by top-rated companies at 150-200 basis points below bank loans. Most of the debt was raised by government companies as they have top-rated status.
For AAA-rated corporate bonds, the yield was 6.85 per cent in May 2020, which fell to 5.38 per cent in April 2021 and to 5.16 per cent in May 2021.