The Monetary Policy Report released by the Reserve Bank of India
last week, highlights some interesting trends in credit market. Though the
sharp deceleration in the credit to the commercial sector has been adequately
underlined, I find the following trends also noteworthy from the investment
strategy viewpoint:
(a) Despite conspicuous
rise in the stress in NBFC sector and spate of downgrades, "Interest rates
on CPs moderated noticeably during H1.
Though, CP issuances moderated from July reflecting heightened risk aversion in view of downgrading of a few CP issuers in June and July 2019, the interest rates in the primary CP market – as reflected in the weighted average discount rate (WADR) – moderated sharply by 130 bps during H1:2019-20, facilitated by the easing of liquidity conditions.
(b) The risk premium declined sharply to an average of 64 bps in August-September on account of (i) the liquidity effect emanating from the switch in liquidity conditions from deficit to surplus since the beginning of June 2019; (ii) the predominance of issuances by top rated issuers raising funds at competitive rates; and (iii) the measures taken by the government and the Reserve Bank to provide liquidity support to NBFCs.
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(c) During H1:2019-20, policy transmission was nearly complete in all segments of the money market. Of the three policy announcements during this period, the maximum impact was felt after the June policy – which signaled both a rate cut and a change in the stance from neutral to accommodative.
(d) While credit growth to
agriculture and personal loans remained broadly unchanged in the last one year,
credit growth to industry moderated in the last four months after accelerating
continuously between August 2018 and April 2019. Credit growth to services has
decelerated sharply since January 2019.
Of the incremental non-food credit flow during the year (August
2019 over August 2018), personal loans accounted for the largest share,
followed by services and industry. Within personal loans, credit offtake has
been broadly concentrated in two segments, viz., housing and credit card
outstanding. Within industry, credit growth to beverages and tobacco,
cement, engineering, vehicles, construction and infrastructure (viz., power,
telecommunications and roads) accelerated.
(e) Credit quality has
deteriorated with both the stressed assets ratio and the non-performing assets
(NPA) ratio increasing marginally in June 2019 after four successive quarters
of decline. Sector-wise analysis indicates that the NPA ratio deteriorated for
all sectors in June 2019, barring industry.
(f) With muted credit
offtake and decline in non SLR investments, banks have augmented their SLR
portfolios despite the reduction in SLR by RBI. Banks held excess SLR of 6.9
per cent of net demand and time liabilities (NDTL) on August 30, 2019 as
compared with 6.3 per cent of NDTL at end-March 2019.
(g) Overall, financial
flows to the commercial sector in 2019-20 so far (up to mid-September) have
been lower than in the same period last year due to a decline in funding from
banks and lower funding from non-bank sources.
However, among domestic non-bank sources of funding, public
issues of equity and private placement increased significantly. Among foreign
sources, both external commercial borrowings and foreign direct investment
(FDI) registered sharp increases. Notably, end-use provisions were rationalized
in July 2019.
(h) The weighted average
lending rate (WALR) on fresh rupee loans declined during February-August 2019
across bank groups, with the largest decline observed in foreign banks and the
least in public sector banks.
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In conclusion, the slowdown in credit is a concern, but it may
not be as alarming as it is being made out to be. Diversification of sources of
funds and large base effect may have some role to play in the credit
deceleration. However, the primary reason could be disruption in PSBs due to
restructuring and other governance factors. Liquidity or availability of credit
does not seem to be a concern at present.
The indebtedness at the household level is rising. This is
both an opportunity and threat for the financial sector.
In my view, it is more a matter of time when the goals of
PSBs and borrowers match and the credit growth begins to accelerate.
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