GDP contraction leads to horrible loan growth arithmetic

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MUMBAI: Indian policymakers are hoping for an economic recovery, balanced on the shoulders of credit and pushing banks to relax and take risks. Reserve Bank of India (RBI) Governor Shaktikanta Das made another call on Thursday for banks to abandon risk aversion because too much of it is self-defeating.

But a year of recession is not even a reasonable opportunity for credit growth. Credit is an indicator of lagging economic performance and this itself should be of concern to policymakers now.

For the first four months of FY21, the credit hardly increased. RBI data shows bank lending contracted 1.5% during this period while year-over-year growth was 5.5%. The outstanding credit of the banking system has fallen to 101.47 trillion as of August 14. An RBI survey of professional forecasters puts credit growth at 5% for FY21. To show this growth, banks will have to lend collectively at least 5 trillion in the remaining eight months of this year. It’s easier said than done.

“Historically, credit growth has been a little higher or similar to this. This year we might see stable nominal GDP growth. So even 5% loan growth seems exaggerated,” one economist said asking. anonymity.

As the chart opposite shows, past impressions of double-digit credit growth have always been preceded by healthy double-digit nominal GDP growth.

To be sure, economists have pointed to the weakening of this correlation between bank credit growth and GDP growth in recent years. This is because borrowers resort to other cheaper sources of finance such as the bond market and non-bank lenders.

However, in FY 21 these other two sources may also be limited. While corporate bond issuance in April-July rose 23% year-over-year, non-bank lenders had little growth to show.

Then there is the issue of bank risk aversion. A lack of visibility into the strength of corporate balance sheets means that banks have little reason to lend freely. An August 24 research report from Standard Chartered notes that debt service metrics for publicly traded companies in FY20 were the worst in almost 10 years. Indeed, in a virtual event last week, most bankers argued that rampant lending to weak companies would now be reckless of them.

Another drag is the paralysis of public sector banks, excluding the country’s largest lender, the State Bank of India (SBI). Small public sector lenders barely have the capital to lend and would end up using the capital only to make provisions.

Bankers are preparing to reduce their capital and conserve their capital and they cannot be blamed when borrowers do the same.

The depth of the deceleration in loan growth can be gauged once the June quarter GDP growth figures are released later today. The economy is expected to contract between 20% and 25%. This does not bode well for loan growth in the months to come.

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