More Than Just Risk Aversion Behind Weak Credit Growth: SBI Research

A sharp fall in credit growth in the Indian economy, despite comfortable liquidity conditions, has raised concerns about risk aversion in the banking system.

Bank credit grew just 8.8 percent in the fortnight ended Sept. 27, showed the latest data release from the Reserve Bank of India. Monthly bank credit growth, too, has shown a steady decline, which, in turn, has crimped the flow of commercial resources to the economy.

What’s the reason for this, particularly since liquidity conditions are now comfortable and the capital cushion available to public sector banks has improved?

Risk aversion is the most common answer.

SBI Economic Research, however, said that there could be other factors at play.

Corporate deleveraging and a change in the RBI’s ‘Large Exposure Framework’, along with poor utilisation of existing credit lines by corporates, have led to a fall in bank credit growth, said Soumyakanti Ghosh, chief economist at SBI, in a research report on Wednesday.

According to the report, the top 10 corporates alone reduced debt by around Rs 2.2 lakh crores, a large part of which could have been used to repay the banks.

“If we adjust for such deleveraging the credit numbers could portray a different story. Clearly, repayments have far outstripped disbursements resulting in negative credit expansion,” Ghosh said. “Second, the Large Corporate Framework effective from April 1, 2019, that limits a bank’s aggregate exposure to a group of connected counter-parties at 25 percent of Tier 1 capital, may be acting as a constraining factor in bank lending to such entities,” he added.

Ghosh added that recent disinvestment transactions by the government had meant that certain public sector enterprises have been reclassified as connected parties. He also added that fund-raising via external commercial borrowings has picked up, impacting domestic bank credit growth.

Separately, speaking at a Bloomberg event on Tuesday, SBI Chairman Rajnish Kumar had attributed weaker credit growth to lower utilisation of credit limits by corporates.

Term credit has grown by 18 percent on an annual basis for SBI, while there has been a sharp decline in the sanctioned working capital limits, Kumar said. The bank has given committed funds or lines but utilisation is particularly low among large- and mid-sized corporates, averaging at about 31 percent, Kumar said.

Sectoral Credit Trends

To be sure, the monthly sectoral credit data from the RBI shows a broad-based decline in year-on-year credit growth, which cannot be explained only by deleveraging of large corporates.

The latest data, available until August 2019, shows that credit growth to large corporates has slipped to about 5 percent from above 8 percent in March. Credit growth to SME and medium sized enterprises has turned negative. Year-on-year credit growth to the services sector, which includes NBFCs, has also moderated, which growth in personal loans remains steady.

“As far as the NBFC sector is concerned, though the banks expanded their lending in H1 FY20, the markets seemed to have lost appetite in funding of NBFCs,” said Ghosh. He added that NBFCs, too, have started to tap overseas funds. Nearly 45 percent of the ECBs raised in the first half of the year were by NBFCs, he pointed out.