Despite the fall in interest rates, loan outstandings of Indian corporates have plummeted by Rs 2,36,600 crore between March 18, 2016, and April 28, 2017, on account of the slowdown in the economy, steep fall in investments and the ballooning bad debt. However, personal loans, or retail loans, including auto, home and consumer durable loans, rose 10 per cent in the period.
Industry’s bank exposure has declined to Rs 24,94,100 crore in April 2017, from March 18, 2016 high of Rs 27,30,700 crore, according to the Reserve Bank of India (RBI) data. Demonetisation has exacerbated the already parlous situation with credit outstandings declining by over Rs 85,000 crore after the withdrawal of Rs 500 and Rs 1,000 notes in November 2016.
While top banks, including State Bank of India (SBI), slashed marginal cost-based lending rate (MCLR) by up to 90 basis points, corporates have not shown any inclination to go for capital expenditure (capex) in new projects. “Fresh investment in large scale projects is not coming. The year-on-year growth (credit offtake) is subdued. You need massive investments for a higher credit offtake,” SBI managing director Rajnish Kumar said in a recent interview to this paper.
According to the RBI data, loan outstandings of large industries fell from Rs 22,44,400 crore in March 2016 to Rs 20,59,300 crore in April. Loan exposure of micro and small units declined by over Rs 31,000 crore to Rs 3,40,400 crore and that of medium industries declined by close to Rs 20,000 crore to Rs 94,400 crore in a year. It coincided with the deceleration in the economy: Gross value-added (GVA) growth, excluding the impact of taxes and subsidies, fell sharply to 6.6 per cent in fiscal 2017, from 7.9 per cent in the previous financial year. Many of the top corporates that are saddled with bad debts are not in a position to go for further borrowings. Banks are trying to sell the assets of many debt-hit corporates. Moody’s Indian affiliate ICRA has estimated that gross non-performing assets will increase to Rs 8,20,000-8,50,000 crore (9.9-10.3 per cent of advances) by the end of FY18 as against Rs 7,65,000 crore by the end of FY17.
Experts say corporates which stopped making fresh investments in new projects five years ago are yet to begin investments in new projects. “The year-on-year growth in gross fixed capital formation recorded a sharp deterioration over the course of FY17, culminating in a 2.1 per cent contraction in Q4 FY17, reinforcing the assessment of the prevailing lull in investment activity,” Aditi Nayar, principal economist, ICRA Ltd.
Many corporate are now depending on debt market and instruments like commercial papers. Once-bitten-twice-shy banks are extra cautious in lending to corporates. “Banks are now slow in disbursing loans to corporates. It’s not only the bad loans. There’s fear of investigation agencies coming after bank officials for loan defaults. Banks are comfortable with retail lending where bad debts are low and recovery is easier,” said a senior bank official.
With banks trying to revive credit offtake through retail loans, personal loans jumped by Rs 1,45,300 crore to Rs 15,37,500 crore from March 2016 to April 2017. Vehicle loans rose by Rs 12,000 crore to Rs 1,64,500 crore by April 2017 and housing loans by Rs 69,700 crore to Rs 8,16,500 crore.
The impact of demonetisation on the industrial sector, especially manufacturing and construction activity, was most pronounced in the fourth quarter. While manufacturing growth reduced to lowest level (5.3 per cent) since December 2014, construction activity recorded negative growth (-3.7 per cent) for the first time since March 2014, a Crisil report said.
On the other hand, the number of stalled projects is also expanding. According to the Centre for Monitoring Indian Economy (CMIE), projects worth Rs 1,40,000 crore ran into rough weather during April 2017.
Analysts are optimistic about a recovery in credit growth. “With relative improvement in the macroeconomy, we estimate systemic loan growth rate to rise to 10 per cent year-on-year in FY18, aided by waning credit substitution as banks effectively price as per the MCLR curve, continued growth momentum in retail aided by declining product rates, and a modicum of revival in corporate credit on higher inflationary expectations and improved utilisation of industrial capacity,” said an ICICI Securities report.