The credit market is in a curious state. Companies that need credit are not getting it from banks, while loans are offered to those who do not need it.
There were not many takers even for the covid-19 credit lines, which the government wants banks to aggressively push, two bankers said requesting anonymity.
Demand is primarily from small businesses, which are finding it difficult to pay staff salaries and meet fixed costs. “It is the small businesses, like a supplier to large manufacturers, that needs the covid-19 emergency credit lines. The working capital cycle of these small borrowers have been hit because of payment delays by their big customers during the lockdown,” said the first banker.
But, these businesses are finding it difficult to access institutional credit. Most banks have turned risk-averse and are happy to park their money with the Reserve Bank of India (RBI) even at a 3.75% interest rate.
On the other hand, bigger businesses can still sustain with their resources and, therefore, lenders have not seen much credit demand from them.
By the end of March, state-run banks, including State Bank of India (SBI), Union Bank of India and Bank of Baroda (BoB), had offered a scheme for covid-19 emergency credit lines. These were mostly limited to 10% of the borrowers’ fund-based working capital limit.
Credit growth has been subdued for quite sometime, and between 13 March and 10 April, non-food credit grew by 2%. However, for FY20, credit growth stood at 7.6% and was led by large corporates and non-banking financial companies (NBFCs). This was before the onset of the covid-19 lockdown and closure of factories, which has led to credit demand from large businesses dropping.
“Given that the growth outlook in this lockdown scenario remains challenging, focus is on asset quality, liquidity and capital adequacy,” said a note by Centrum Institutional Research on 5 May.
However, with pressure from the government increasing, banks are pushing customers to send emails and get the 10% extra credit line approved, even if they do not plan to use it, said the second banker. “We have to show that the bank has sanctioned credit in the form of covid-19 credit lines. So, we are calling up borrowers and trying to convince them to take it. It does not necessarily mean they have to use it and an emailed confirmation is sufficient to extend this line. The bank does not need to portray utilization of the funds, a mere disbursement is satisfactory.”
RBI’s plan to dissuade lenders from using the reverse repo window to park excess liquidity has not made any headway either.