Ever since the outbreak, and the extended lock downs that followed, the economy has unfortunately taken a major hit in revenue. This has forced Indian banks to park Rs 8.5 lakh crore under the Reserve Bank of India’s (RBI) reverse repo window on Tuesday, this is the the largest single-day amount. This comes after RBI Governor Shaktikanta Das asked bank chiefs to further their lending to end customers, non-banking financial companies and microfinance institutions.
As tensions rise, banks took the safer approach and placed their funds in the safe-mode reverse repo which also indicates why bank credit growth has gone down considerably. According to the ICRA, the credit flow from bank credit, bonds outstanding and commercial paper has declined by a staggering 64 per cent to Rs 6 lakh crore during Financial Year 2020 from Rs 16.79 lakh crore in Financial Year 2019.
One of the hardest hit sectors is Finance. As revenue fell and viable investment options have become thin, demand for credit went down considerably, this has forced banks to place a significant amount of liquidity under the reverse repo window even though the central bank made it unattractive by cutting interest rate to 3.75 per cent in March.
There is expectation that there will be an increase in incremental credit flow during FY21 due to increased credit demand because of weakening cash flows of borrowers, as well as the capitalization of interest for the period of moratorium offered by lenders.
Whereas the growth in bank credit seen on a weekly basis was mostly led by lending made to NBFCs and personal loans. Their combined contribution formed more than 80 per cent of the incremental bank credit in FY20.
Unfortunately, the overall growth in credit continues to stagger as large industries and trade services have reduced their borrowings due to uncertainty. The combination of industries and trade was 37.5 per cent in outstanding credit, but incremental credit was only 11 percent down from 26.2 per cent last year.
Retail loans may face some contraction in credit offtake as consumer demand goes down due to reduced revenue. Also, real estate sector may face the most stress as consumers my delay getting a new house, this leads to a reduction in housing loans taken. Housing loans represents more than half of retail loans.
