Money & Banking

Weak credit offtake likely to exacerbate slowdown, says Ind-Ra

Our Bureau Mumbai | Updated on December 31, 2019 Published on December 31, 2019

The rating agency also said that banks are well capitalised.

The banking system’s lacklustre credit growth has more to do with the lack of credit demand rather than credit availability, according to India Ratings and Research (Ind-Ra). The weak credit offtake is likely to exacerbate the current slowdown in terms of intensity and recovery time, it added.

In this regard, the credit agency underscored that corporate credit offtake from banks would remain limited in the near term, considering the subdued demand. “The muted demand for loan is largely explained by the absence of capital expenditure (capex). Secondly, with the increasing risk averseness in the system, the credit is made available to borrowers with strong credit metrics and also at a reasonable price. However, need for credit by those entities is relatively less either because of their strong balance sheet or other alternative sources (external commercial borrowing, foreign currency convertible bonds or domestic bond market),” said Jinesh Rajpara, Analyst, in research report.

The agency believes that unlike in the past, the banking system is well capitalised with both private and public sector banks ready to push the system credit growth. Specifically on the public banks side, while capital availability is no longer a challenge, the ongoing amalgamation will keep the focus of the banks involved away from credit growth in the near term.

‘Weak economic sentiment’

"On an overall basis, a weak economic sentiment resulting in lack of new project announcements along with the sharp slowdown seen in the non-banking finance company (NBFC) sector resulting from the ongoing challenges on liquidity are likely to keep the credit growth expectations muted for the banking sector in the near term," the report said.

The overall non-food credit growth for scheduled commercial banks remained weak in October 2019 at 8.3 per cent year-on-year (y-o-y), down sharply from 13.4 per cent y-o-y in October 2018 and marginally up from 8.1 per cent y-o-y in September 2019.

At a more granular level, growth in the retail segment remained strong at 17.2 per cent y-o-y (September 2019: 16.6 per cent y-o-y; October 2018: 16.8 per cent y-o-y).

Further, growth in retail loans contributed nearly 53 per cent to the incremental growth in scheduled commercial banks’ credit during in October 2019, the agency said.

Annual credit growth in the agriculture and industry sectors remained largely stable at 7.1 per cent and 3.4 per cent, respectively, during the month. However, the weakness in credit growth has intensified in the services segment at 6.5 per cent in October 2019 from 27.4 per cent in October 2018.

Sharp slowdown by NBFCs

On a sub-sector basis within the services segment, the agency found that funding to key contributing sectors such as NBFCs and other services had seen a sharp slowdown in October 2019 in comparison to October 2018.

Ind-Ra assessed that the NBFCs, which contribute about 30 per cent to the services segment, saw a credit growth slowdown at 26.8 per cent in October 2019 from 55.6 per cent in October 2018.

Other services segment with a contribution of about 23 per cent, saw a credit growth slowdown at 12.7 per cent y-o-y in October 2019 from 35.6 per cent y-o-y growth in October 2018.

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Published on December 31, 2019
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