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The decline and fall of bank credit

LiveMint logoLiveMint 24-03-2017 Aparna Iyer

Bank credit growth, the bedrock of funding for the Indian economy, is at a historic low and this year, it will probably lag gross domestic product (GDP) growth for the first time in decades. While this has caused enough anxiety, not many are losing sleep over it and certainly not the investors.

That is because Indian companies are not choked of funds (even those firms named as bad assets in bank books) as many have shifted to borrowing from non-bank resources such as bonds, equities and also non-banking financial companies. It may also explain why policymakers forecast the real GDP growth to be a strong 7.1% despite the dismal loan disbursals.

Graphic: Subrata Jana/Mint

While for all practical purposes, bank credit growth is a gauge for how the economy is performing, it is but a slice of the whole picture and that slice is getting smaller every year. The rate of disintermediation has picked up pace after banks got saddled with a colossal bad loan stockpile of Rs7 trillion. The share of bank credit in the total flow of financial resources to the real (commercial) sector has dipped to 22% this year from as much as 45% four years ago.

So where did Indian companies go shopping for funds?

The most spectacular rise is in the bond market as its share has risen to 33% from 22% because issuances jumped 22% from a year ago. The shift to bonds set in from early fiscal year 2015. Bond issuances so far in 2016-17 have totalled a little over Rs5 trillion and, at this level, it would be the second year that resources raised through bonds will exceed that of bank loan disbursements. Data from the Reserve Bank of India shows that banks have disbursed a little over Rs3 trillion worth of loans so far this year. Of course, there is enough heartburn among bankers who were expecting credit growth to pick up in the January-March quarter and it has only decelerated even more.

Short-term commercial papers too seem to be favoured with their share increasing to about 8%. Although foreigners were reluctant to fund Indian companies’ debt offerings abroad, foreign direct investment flow into the country has been healthy.

It seems that raising resources has not become difficult but the fact that the total fund flow to the real (commercial) sector has dropped 20% this year reflects the dire straits our investment climate is in.

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