Tag: bank lending

Non-industrial sectors dominate non-food credit growth since 2014

Banking & Finance

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The overall non-food credit growth during the period 2014-15 to 2020-21 was almost entirely driven by expansion of credit to non-industrial sectors, particularly lending to the retail segment in the form of personal loans, per an article in the Reserve Bank of India’s latest monthly bulletin.

Active participation of both the dominant-group (including six leading banks on the basis of their share in total non-food credit) and the other-group of banks (which includes the remaining 27 banks) is driving credit growth to the non-industrial sectors, according to an analysis of 33 select banks by RBI officials Pawan Kumar, Manjusha Senapati and Anand Prakash.

Impact of Covid

The authors observed that credit extended by the other-group to the industrial sector was affected significantly due to Covid-19 but the performance of this group is better than the dominant-group as far as credit to agriculture and services sectors is concerned.

They said that, “The sharp slowdown in industrial credit, especially by other-group of banks, warrants attention and steps to step up credit offtake commensurate with appropriate risk-taking, a number of which have already been taken by the Government and the Reserve Bank, could defreeze the credit market for the industrial sector and help in reviving the growth momentum derailed by the Covid-19 pandemic.”

After witnessing a significant slowdown in credit offtake during 2019-20 and 2020-21, there has been some uptick in credit growth in the recent months notwithstanding the second Covid wave, which augurs well for the economy, the authors said.

Credit boom period

According to the article, bank credit growth has witnessed significant fluctuations in the past one and half decades.

“The period between 2007-08 to 2013-14 could be characterised as bank credit boom period in the Indian economy, as non-food credit registered double digit growth, primarily driven by robust credit growth to the industrial sector,” the authors said.

Both dominant-group and other-group of banks lent aggressively to the industrial as well as other sectors.

Also see: E-mandate processing: Banks, payment aggregators rush to meet deadline for recurring online transactions

Within industries, infrastructure, and basic metal & metal product industries accounted for a major portion of credit offtake from both the bank groups during the credit boom period.

Credit cycle reversal

Thereafter, however, the credit cycle reversed along with a shift in the sectoral deployment of bank credit.

“During 2014-15 to 2020-21, overall credit growth decelerated, primarily driven down by reversal in credit growth to the industrial sector because of deleveraging by non-financial firms, increasing dependence on non-bank sources for financial resources, and some risk aversion on the part of banks, especially by the other-group of banks to lend to industries, which got further compounded after the outbreak of Covid-19 pandemic,” the authors said.

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RBI’s Financial Stability Report: Private banks’ credit to PSUs grew in 2020, while PSB credit fell

Banking & Finance

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Only in March 2020 did PSBs see a marginal rise in credit to private firms amid a rush for credit in the initial months of the lockdown.

In a reversal of a long-standing trend, private banks’ credit to government-owned entities grew rapidly through much of 2020 even as public sector banks (PSBs) saw a decline, according to data from the Reserve Bank of India’s (RBI) financial stability report (FSR) for December 2020. Industry executives attributed the phenomenon to the surfeit of liquidity in the system and the simultaneous lack of lending opportunities during the year.

While private banks’ exposure to public-sector units (PSUs) grew in double digits on a sequential basis in March, June and September 2020, PSB credit to this category of borrowers shrank in the June and September quarters. In the non-PSU segment, credit deployed by both categories of banks declined on a quarter-on-quarter (q-o-q) basis throughout 2020. Only in March 2020 did PSBs see a marginal rise in credit to private firms amid a rush for credit in the initial months of the lockdown.

Historically, PSBs have held a larger market share in the government and PSU lending space. Lending to the government and state-owned entities is often done at a relatively finer pricing as the risk weights assigned to this segment is much lower. Private banks, which typically have to shell out more than PSBs for deposits, do not find it viable to lend too cheaply. Sameer Narang, chief economist, Bank of Baroda, said that PSBs tend to have a higher market share in lending to government-owned enterprises, where the risk weights and thus lending rates are lower.

“Only those banks who meet that pricing who have a much lower cost of deposits,” he said.
That changed in 2020 as the central bank inundated the system with liquidity at a time when there was little appetite for credit among companies. Madan Sabnavis, chief economist, Care Ratings, said that there were fewer opportunities for lending with some companies preferring the bond market and therefore, private banks lent to PSUs.

Another factor at play was the erosion in the capital bases of PSBs. “Some of the PSBs have been constrained on account of availability of capital in order to do any kind of lending,” Sabnavis said, adding, “Private banks have capitalised on this as they wanted to grow their books in an environment when there was not much borrowing taking place from the non-PSU companies.”

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High spreads still shows reluctance to lend by banks

Banking & Finance

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While the overall lending rates have declined when we look at the headline rates, the transmission is probably slower when we look at various products or risk segments.

Pace of change slowing down. As per RBI’s latest release, the rate of decline in fresh lending and deposit rates has started to slow down. However, the spread between average lending rate on outstanding and fresh loans stayed around ~110 bps. The headline yield movement suggests spreads are holding up but further expansion looks unlikely. High spreads do not augur well as it still shows reluctance to lend, in our view.

As per the latest data from RBI, TD rates were flat m-o-m at ~5.6% (down ~100 bps y-o-y). Weighted average TD rates were flat m-o-m for both private and PSU banks. Private and PSU banks have reduced their TD rates by ~110 bps and ~90 bps respectively over the past twelve months.

TD rates had been on an upward trend from December 2017 to February 2019, increasing ~40 bps to 6.9%, post which TD rates had been flattish for a few months and started to decline (down ~120 bps since June 2019). Wholesale deposit cost (as measured by CD rates) has seen a much sharper decline of ~320 bps in FY2020 followed by a further decline of ~180 bps in YTD FY2021.

The weighted average TD rate is broadly similar to the TD rate (1-2 year tenor) offered by most banks today; slightly lower than rates offered by SFBs. We have started to see banks, especially private banks, cutting headline TD rates in the past few quarters. The gap between repo and 1-year TD rate for SBI has been flat ~90 bps after declining from peak levels of ~130 bps.

Lending rates on fresh loans were down ~5 bps m-o-m to ~8.3% in November 2020. Fresh lending rates have been range-bound over the past few months after declining from the peak level of ~10% seen in January 2019. Private sector banks saw a decline of ~10 bps m-o-m to ~8.9%, while PSU banks showed a ~10 bps decline. The gap between fresh lending rates of private and PSU banks now stands around the ~100 bps average level seen over the past twelve months.

Lending rates on outstanding loans were marginally down m-o-m to ~9.4% in November 2020, having declined ~80 bps since November 2019. Banks have been cutting their MCLR rates over the past few months. Private banks and PSU banks have cut their MCLR by an average of ~90-100 bps in the past 12 months.

The gap between outstanding and fresh lending rates has been in the range of 110-140 bps for the past nine months. The gap had been increasing before that led by a steady decline in fresh lending rates. Steep decline in bond market rates till July 2020 led to a narrowing of the spread between bank funding and bond rates.
While the overall lending rates have declined when we look at the headline rates, the transmission is probably slower when we look at various products or risk segments.

In a relatively low growth and heightened risk environment, especially after Covid, we note that the spreads have continued to remain high. The spread over G-Sec with deposits and loan rates has widened implying banks are seeing lower spreads on investments and better spreads on loan yields. While we are witnessing some positive trends on recovery in loan enquiries, we still believe that there is still some time before it reflects in loan growth.

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