ANALYSIS. For some banks, loan repayments via old notes affect credit growth

Until now, the obvious and much talked about impact of demonetisation on banks has been the high accretion of deposits.

But demonetisation has left its mark on the lending side too, by marginally slowing loan growth. Bank credit growth touched multi-year lows, recording a mere 5 per cent year-on-year growth in the December quarter.

Apart from the slowdown in economic activity impacting credit offtake, repayment of loans in old currency notes, mainly in the SME and agriculture segments, has impacted loan growth marginally for some banks.

As most of the small businesses operate in cash, lower working capital (in cash) requirements post-demonetisation saw many of these companies repay their loans. Going by the figures disclosed by a few large banks, SME loans repaid in old notes could well be ₹40,000-60,000 crore at the system level in the December quarter.

Credit growth, which had been rising at an abysmal 8-9 per cent before demonetisation, slipped to a meagre 5 per cent by the end of December. It is true that tepid borrowing appetite by highly-leveraged corporates and banks’ reluctance to lend failed to spur loan growth even after a substantial fall in lending rates over the past year. Demonetisation only made matters worse.

For Bank of Baroda, close to ₹5,082 crore of MSME loans were repaid in old notes during November 9-December 30, 2016. These were working capital facilities and term loan finance for MSMEs.

In the December 2016 quarter, Bank of Baroda’s MSME loans stood at around ₹53,000 crore, down from around ₹55,700 crore in the September quarter. The bank has 11-13 per cent market share of the overall MSME loans within the banking system.

According to Punjab National Bank, demonetisation resulted in cash collection of ₹53,000 crore into current account, and savings account (CASA) deposits and ₹14,000 crore into loan accounts.

As of December, the bank’s MSME loans stood at ₹78,933 crore, about 17 per cent of total MSME loans in the system.

In a post results conference call, HDFC Bank’s management stated that it witnessed reduced drawdowns because a certain amount of repayment happened through deposit of old notes.

SMEs typically draw down their limits and use cash for their working capital. But since they could not purchase or make other payments in cash post-demonetisation, the currency which was otherwise in use for their working capital was deposited back in their accounts.

And, to that extent, the loan outstanding for the business banking vertical (SMEs fall under this segment) came down by ₹2,000 crore for HDFC Bank in the December quarter.

HDFC Bank has a market share of about 7 per cent in the SME lending space.

As of the December quarter, the bank’s SME loans stood at about ₹32,000 crore.

A back-of-the-envelop calculation based on the numbers reported by a few banks and their market share suggests that ₹40,000-60,000 crore of loans may have been repaid by the entire sector during the December quarter.

Some bankers, too, concur that old notes to the tune of ₹50,000 crore may have been used to repay loans in the December quarter.

This is about 1 per cent of the total loans within the system, but 10 per cent of the total MSME loans.

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