CRISIL forecasts bank credit growth will plummet to 1% with the economic fallout COVID-19

The COVID-19 pandemic and the ensuing economic impact will lead bank credit growth to nosedive to only 1 per cent in 2020-21, as against the 6.14 per cent achieved in the the last financial year, a report said on Monday. Domestic rating agency Crisil, which estimates bank credit growth to come at 0-1 per cent in this financial year, had earlier predicted it to expand by 8-9 per cent.

Bank credit is an important factor illustrative of the general economic climate because it denotes aspects like the investments which are happening in a country or consumption of high-value items. Crisil expects a 5 per cent contraction in India's GDP for 2020-21.

"The impact of the pandemic on credit growth will be a whopping 8 per cent," a Crisil statement said stressing that lenders' confidence needs to be boosted to push the number up.

"This crisis is unprecedented and so will be its economic fallout – such as lower capex demand as well as lower discretionary spends, to name some – which will slow down credit offtake significantly across segments in the current fiscal," its senior director Krishnan Sitaraman explained.

The low-base and a gradual economic recovery will push up the credit growth to high single digits in 2021-22, the agency said.

It, however, rued that in the present, the uncertainty has made lenders risk-averse.

"While the Reserve Bank of India has been reducing policy rates and the government has introduced measures to encourage lending, banks continue to be risk-averse, as reflected in higher surplus liquidity parked with the central bank and the high credit spreads for most borrowers," its director Subha Sri Narayanan said.

Sitaraman said the corporate loan portfolio, which constitutes over half of the overall assets, will be the worst hit and is expected to de-grow during the fiscal because the lockdown has led to significant disruption in operations with limited capacity utilisation across sectors.

Job losses and salary cuts will reduce expenditure on discretionary items and result in a slide in retail loans, which account for about a fourth of bank credit, it said.

Purchase of new homes and vehicles are expected to be delayed, impacting demand for financing, it said, adding disbursements across most asset classes will see a significant decline this fiscal.

The overall retail loans growth will fall to low single digits as against mid-teens over the last few years, it said.

Factors aiding the retail growth to be in the positive territory will be lower repayments due to the moratorium and capitalization of the accumulated interest, it said.

Loans to micro, small and medium enterprises and agriculture offer some solace for lenders this fiscal, the rating agency said.

On the back of the government's fiscal stimulus package, small business loans will increase by 6-7 per cent and are likely to be driven by state-owned lenders, it said.

Agri loans will grow by 3-4 per cent supported by expectations of a normal monsoon and a faster recovery in rural areas.

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