Covid-19 Impact: Banks Shun Credit To Small, Medium Businesses 

The Indian banking sector shunned lending to small and medium-sized businesses, while also staying away from riskier personal loans.

Total non-food credit rose 6.8% in May compared with 11.4% last year, shows monthly bank credit data released by the Reserve Bank of India. Credit growth to industry fell to 1.7% compared to 6.4% a year ago. Credit to micro and small enterprises contracted 3.4%, while lending to medium sized enterprises fell 5.3%.

“Credit growth to 'chemicals & chemical products' 'construction', 'infrastructure', ‘food processing', ‘textiles', and ‘all engineering' decelerated/contracted,” the RBI said in its release.

Judging Incremental Lending

While the annual changes are often skewed by base effect, incremental lending data gives a clearer picture of the parts of the economy where credit is flowing and where it is not.

From March till May, incremental non-food credit contracted 2%, similar to last year. However, the composition of credit changed significantly.

• Incremental credit to micro and small units fell 7.6% compared to a 2.7% drop in the same period last year.
• Credit to medium-sized enterprises fell 5.4%. It had fallen 0.9% in the same period last year.
• Disbursements to large enterprises fell 0.4% compared to a steeper fall of 2.5% last year.

Credit Flow Across Industries

Incremental credit to all industries fell 1.5% between March and May this year, compared with a drop of 2.5% in the same period of the previous years.

• Incremental credit to engineering firms fell 1.3% compared with a 2.1% drop in the same period last year.
• Credit to construction firms fell 3.7% against a fall of 2.1% in the same period last year.
• Disbursements to food processing companies fell 3.1% versus a steeper fall of 3.4% last year.
• Incremental bank credit to infrastructure projects grew 0.1% between March and May this year compared to a 1.3% fall last year

For companies in specific industries, incremental bank credit growth during the first two months of this fiscal fell significantly, in some cases to the lowest growth rate in five years:

• Outstanding loans to chemical manufacturers fell 10.2% between March and May 2020 compared with a decline of 8.1 % in the same period last year.
• Loans to tea producers fell 18% compared to an increase of 1.1% in the same period last year.
• Credit to fertiliser companies fell 30% between March and May compared with a drop of 15.2% last year.
• Telecom firms experienced a 4% contraction in incremental bank credit against an increase of 7.15% last year.
• Bank credit to jute textile manufacturers fell 7.5% between March and May compared with an increase of 1.5% last year.
• Loans to glass manufacturers fell by 7% between March and May compared with a drop of 0.24% last year.

Downturn In Retail and Micro Credit

The aversion to unsecured credit, which began as the Covid-19 crisis disrupted jobs and incomes, continued. Meanwhile, reduced spending brought down credit card outstanding loans.

• Outstanding credit card loans fell 14.1% between March and May 2020 compared with an increase of 6.1% in the same period last year.
• Consumer durable loans fell 6.4% compared with a 3.4% decline in this period last year.
• Outstanding person loans fell 3.6% between March and May against a 2.8% increase last year.
• Housing loans also declined 0.7% in the first two months of this financial year compared with a rise of 1.4% last year.
• Lending towards micro-credit fell 9% compared with a 14.6% increase in the same period last year.

Suresh Ganapathy of Macquarie Securities noted that growth had slowed further across all major categories of retail loans.

“Within the retail loans, mortgage loans grew at 12.9% -- slowest since Nov-17, while the growth in personal loans slowed down further to 12.3%. Credit card loans declined 0.8% YoY – first time since Apr-14,” Ganapathy said in a report on Wednesday.

He added that the lending market is facing a number of issues.

“While there will be willingness on the part of the lenders to do more secured products backed by collateral, the demand for these products is expected to decline due to affordability issues and a reduction in discretionary spending by consumers,” Ganapathy said. “Also, demand for personal loans is expected to be high as individuals try to bridge their personal finance gap, the willingness on the part of the lenders to incrementally lend is extremely low due to increased risk of defaults in the aftermath of Covid-19.”