Non-food credit offtake plunges to 4-year low

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Widespread risk aversion causes slump in sanctions

Non-food credit has slumped to a four-year low in the first half of the financial year, indicating that the weaknesses in the economy continue.

Between April 1 and November 15, non-food credit offtake was Rs 1,000 crore lower than in the comparable period last year. But seen against the corresponding period of 2008-09, it was Rs 40,000 crore lower. That year non-food credit had peaked.

Bankers say the offtake so far has been low because of widespread risk aversion and no fresh credit sanctions, which normally come during the first half. Most of the offtake has been of working capital.

In an exclusive interview with PTI, published by this paper in Monday’s edition, Union finance minister P Chidambaram asked banks to restructure loans of stressed sectors, saying “A bank cannot do business only when the times are good, banks must also do business when times are difficult.”

“When the times are difficult, accounts will become non-performing assets (NPAs), but then RBI allows NPA accounts to be restructured,” the finance minister said, adding this has been done in the past and it is being done in various countries.”

Credit offtake from April 1 to November 15 stood at Rs 2,25,000 crore, or 41 per cent of deposits; at this point last year it was a little over 50 per cent. But 2008 was the best year with 83 per cent.

Canara Bank’s chief economist, Manoranjan Sharma said, “The credit offtake situation is the worst since 2008. At the moment it doesn’t look too good, since most offtake is only of working capital.”

Working capital drawls have increased largely because of firm commodity prices and weak exchange rates. Although commodity price increases began to slow last week, energy prices remain high. Energy companies form the single largest group with high working capital demand.

A senior public sector bank official said, “There is some risk aversion in the banking system. NPAs are up. Applications for debt restructurings have increased. So bank caution in lending is not surprising.”

NPAs, including restructured assets, are equivalent to almost eight per cent of all bank loans now. Bank officials fear this could mount, further stressing bank balance sheets. An increase in NPAs requires banks to create provisions out of their capital.

The shrinking demand for loans for capital expenditure has triggered concerns among international investors. Morgan Stanley Asia Pacific Economics in its report commented: “The sharp decline in private corporate capital expenditure has limited the productivity gains in the urban workforce. Slowing productivity is reflected in a number of macro- stability concerns, rising non-performing loans, high inflation and widening current account deficits.”

Bankers say the fall in credit offtake was partly on account of the shift to external commercial borrowings (ECBs) for some time. As a result non-government external debt was $270 billion, including private corporate sector ECBs of $134 billion (at June end).

But ECB flows have since gone down. According to RBI data, the average monthly inflow of ECBs now is just $300 million, a third of what it was last year.

Raising ECBs is becoming increasingly difficult in view of global risk aversion and volatile currencies. Although global interest rates have not changed significantly, currency depreciation has increased the cost of debt servicing, especial for companies with only rupee revenues.

Weak credit demand is becoming a cause of concern. Fitch Ratings subsidiary India Ratings’ director Devendra Pant said, “Domestic credit conditions clearly reinforce that investment demand is very low. That is an issue of serious concern for the economy.”

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