Credit Rise Shows Virus Is Leaving Deep Scars on India’s Economy

0
52

[ad_1]

(Bloomberg) – India’s risk averse lenders are becoming one of the biggest obstacles to the country’s rapid recovery from the pandemic-driven recession, as they hold back lending when the economy needs it most.

According to the Reserve Bank of India, loans to companies and individuals have grown by a modest 5.5-6% in recent months, which is half of what it was before the pandemic began. The State Bank of India, the country’s largest lender, wants to nearly double its credit growth rate to 10% in the year started on April 1, but is willing to miss the target.

“This is a very fragile situation,” said Dinesh Hara, chairman of SBI, following the earnings report for the fiscal year ending in March. According to him, the bank will not “compromise” on asset quality in order to achieve its goals.

Khara’s comments highlight the biggest impediment to both leverage and economic growth, which stood at 9.5% this year, already below the central bank’s previous forecast of 10.5% after an unprecedented contraction last year. Risk aversion by banks – or fear of worsening credit in a tough economic environment – could further slow economic recovery, analysts including RBI said.

“Credit is a necessary and probably the most important ingredient of economic growth,” S.S. Mundra, a former deputy governor of RBI, who estimated the multiplier effect of the loan on the growth of nominal gross domestic product by 1.6 times.

In India’s case, it doesn’t help that it is already home to one of the largest problem loan piles of any major economy. And add to this the crisis in the shadow banking sector, which ended in the bailout of two creditors and the bankruptcy of two more over the past couple of years.

RBI expects banks’ NPL ratio to rise to 9.8% by the end of this fiscal year from 7.48% a year ago.

Sluggish investment

While banks are in no hurry with loans, on the one hand, companies are abandoning investment plans amid a lack of demand on the other.

According to the Indian Economic Monitoring Center, corporate readiness for new investments is low and capital costs are falling. While companies posted huge profits mainly on the back of widespread cost cuts, most of them used the additional funds to pay off bank loans.

More than Rs 1.7 trillion ($ 22.8 billion) of debt was written off last year, according to an SBI study in which economists analyzed the 15 largest sectors and 1,000 listed companies. Refineries, steel and minerals and textile companies alone have cut debt by more than Rs 1.5 trillion, a trend that continues this year, Sumya Bank’s chief economist Kanti Ghosh recently wrote.

“Any meaningful recovery from a 10% rise in loan demand will require a significant turnaround in the private capex cycle, which is likely to happen someday as corporations focus on leveraging,” said Teresa John, economist at Nirmal Bang Equities. Pvt. in Mumbai. She predicts 7% GDP growth this year, which is at the low end of a Bloomberg poll with a consensus of 9.2%.

What Bloomberg Economics Says …

“A further drop in credit growth means RBI is likely to give the RBI some more time to rebuild credit before it starts rolling back its stimulus.”

– Abhishek Gupta, an economist from India

Consumers are also recovering their finances, which is negatively affecting overall demand for goods and services, as well as retail loans and, in turn, economic growth. According to analysts at S&P Global Ratings, the current recovery is likely to be less dramatic than the rebound that occurred in late 2020 and early 2021.

“Households are cutting savings,” S&P analysts write. “The desire to rebuild their cash reserves could delay spending even if the economy reopens.”

And while measures to tackle Covid-19 may give banks some respite, the need to raise capital will remain high once the stress of the virus begins to show up in their balance sheets.

“The troubles for Indian banks over the coronavirus pandemic have been exacerbated by a dangerous second wave,” Fitch Ratings’ Saswata Guha and Prakash Pandey said this week, cutting India’s growth forecast by 280 basis points to 10%. This underscores “our belief that renewed restrictions have slowed recovery efforts and left banks with a moderately worse outlook for business and revenue generation.”

More stories like this can be found at bloomberg.com

Subscribe now to stay ahead with the most trusted source of business news.

© 2021 Bloomberg LP

[ad_2]

Source link