Non-food credit growth at 5.5%, banks’ investments in securities at record high

Some banks now bluntly admit that they will choose not to lend at times of extreme uncertainty.

Growth in non-food credit continued to languish at 5.48% year on year (YoY) during the fortnight ended August 14, even as it improved from 5.2% in the previous fortnight. Banks’ investments in securities so far in FY21 stand at Rs 5.7 lakh crore — the highest ever for the corresponding period. Incremental credit declined by Rs 1.7 lakh crore on a year-to-date (Y-T-D) basis to Rs 101.47 lakh crore, showed data released by the Reserve Bank of India (RBI).

On a Y-T-D basis, outstanding non-food credit fell 1.3% to Rs 101.87 lakh crore, revealed the RBI data. In the absence of a pick-up in economic activity, banks have been parking their deposits either with the central bank or in low-risk government securities. Deposits with them stood at Rs 140.80 lakh crore as on August 14, up 11.04% YoY.

Demand in the money markets, too, has been muted. According to data from Care Ratings, the value of corporate bonds issued in July, at Rs 49,013 crore, was the smallest in at least 10 months. The value of commercial papers (CP) — a short-term borrowing instrument for companies — floated in the first fortnight of August stood at Rs 61,152 crore, against Rs 91,338 crore for the whole of July.

In a note on Monday, chief economist of Anand Rathi Share and Stock Brokers, Sujan Hajra, said subdued economic activity is leading to lower transactions and thereby modest credit demand and higher deposit growth. “Also, the economic downturn has turned banks risk-averse (asset quality concerns and bid to preserve capital), leading to lower credit and higher investment (in risk-free government securities) growth,” Hajra wrote, adding, “Despite low returns (3.25%), banks continue to park large amounts with the RBI rather than invest them. This seems to suggest their ambivalence on the direction of yield in the bond market.”

Some banks now bluntly admit that they will choose not to lend at times of extreme uncertainty. Aditya Puri, managing director of HDFC Bank, said at a recent event, “There is no risk aversion but there is prudent banking. If we give money, we expect to get it back. If somebody gives loan now, then someone can say later that it was imprudent lending.”

Others have blamed the poor credit offtake on demand conditions.

State Bank of India chairman Rajnish Kumar, at the same event, said, “We have been pointing out as bankers that there are supply side issues and we also have to see what is the investment in the economy? How many projects have come which need money? Growth of credit is low at about 5-6% against past rates of 15-16% or even higher. That was also a function of the demand.” SBI moderated its loan growth expectation for the year FY21 to 8% from over 10% earlier.