Credit to industrial sector at 7-year-low as economy slows

Heightened risk averseness among bankers coupled with a slowing economy resulted in sustained decline in bank credit to the industrial sector in the last seven years, which dropped to 28.9% in 2021 as compared to 42.7% in 2014, data released by the bi-annual Financial Stability Report (FSR) of the Reserve Bank of India (RBI) showed.

Loans for personal consumption like auto loan, housing loans, also known as retail credit, registered impressive growth during these seven years – from 16.2% to 26.3% - the data showed.

“The environment for bank credit remains lacklustre in the midst of the pandemic, with credit supply muted by persisting risk aversion and subdued loan demand,” the banking regulator said in the report.

“Within this overall setting, underlying shifts are becoming more evident than before. Over recent years, the share of the industrial sector in total bank credit has declined whereas that of personal loans has grown,” it said.

The data also showed bank credit to the private corporate sector recorded a decline for the second successive year in 2020-21. Its share in total bank credit has come down from 37.6% to 27.7% during the 7-year period - 2014-2021.

Overall, banks’ loan growth remained sluggish since the Covid-19 pandemic in India broke out in March last year. Credit growth in 2020-21 was 5.4% - the lowest in four years.

Credit by public sector banks and private sector banks increased by 3.2% and 9.9% (y-o-y), respectively, whereas the loan book of foreign banks remained flat till early June.

In the current financial year, data for which is available till June 18, bank credit declined by 1% - around Rs 1 lakh crore.

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“The overall credit to deposit (C-D) ratio continued on its declining trajectory. The incremental C-D ratio recorded an improvement during Q4:2020-21 but turned negative in Q1:2021-22 (up to June 4),” the report said.

Observing that agriculture and personal loan books remained bright spots and recorded double digit growth in March 2021, the report said loan to these sectors contracted by less than 1% since April.

Fresh loans extended by the scheduled commercial banks showed recovery in the second half of 2020-21, especially for agricultural and personal purposes, the data showed.

The report said new loans to the private corporate and household sectors, which nosedived during the first half, recovered in the subsequent period. Loan demand exhibited signs of revival during the fourth quarter of 2020-21, especially in the share of new loans in total loans.

A report from broking firm Emkay Global said growth in credit to micro, medium and small enterprises in FY21 was mainly aided by the emergency credit line guarantee scheme (ECGLS), with aggregate sanctions at Rs 2.46 lakh crore. “PSBs resorted to heavy restructuring in the SME segment, while the participation of private banks was muted. Stress in the SME segment remains high, which we believe should manifest into higher restructuring due to the recent Covid-19 wave,” the Emkay report said.

Asset quality

Contrary to the expectation, asset quality of the banking sector remained stable in 2020-21 despite widespread economic stress. According to the FSR, gross non-performing assets (GNPA) of scheduled commercial banks were 7.5% of the gross advances – which was at the same level in the year ago period. The previous FSR which was released in January predicted, the GNPA ratio to increase to 13.5% by September 2021 under the baseline scenario and to 14.8% under severe stress scenario.

RBI noted that asset quality remained stable despite banks’ resort to restructuring under the Covid-19 resolution framework was not significant and write-offs as a percentage of GNPA at the beginning of the year, fell sharply as compared to 2019-20, except for private sector banks. Overall, GNPAs declined by 5.9%, mainly due to a fall of 8.4% in bad loans of public sector banks.

Banks’ gross NPAs ratios for two major sectors – agriculture and industry declined during 2020-21, but rose for the personal loan sector. Within the industrial sector too, the ratio reduced for all the sub-sectors in March 2021 relative to a year ago.

While asset quality remained stable in the last financial year, it could rise going ahead.

The stress tests indicate that the gross NPA ratio of commercial banks will increase to 9.80% in the baseline scenario by March 2022 and could increase to 10.36% under medium stress scenarios and 11.22% under severe stress scenarios.

While stress from asset quality may rise going ahead, the RBI said banks have sufficient capital, both at the aggregate and individual level, even under stress.

Banks were able to improve their capital positions during 2020-21 by raising equity which resulted in capital adequacy ratio increasing by 130 basis points from 14.7% in March 2020 to 16% in March 2021, with private banks improving their ratios even further.

“Under the baseline and the two stress scenarios, the system level capital adequacy holds up well,” RBI said, adding the capital adequacy ratio is seen moderating by 30 bps between March 2021 and March 2022 under the baseline scenario and by 130 bps and 256 bps, respectively, under the medium and extreme stress scenarios.

(The writer is a senior Mumbai-based journalist)