Borrowers Avoid New Debt Even as Government Encourages Stimulus Through Bank Loans

MUMBAI: Even though the government’s stimulus measures rely heavily on credit flows to sectors of the economy, borrowers do not appear to be in the mood for more loans yet, bankers and experts said .

They said if the banks sanctioned the loans, customers did not use their limits, waiting for the lockdown to be lifted and economic activity to resume. A comparison between the finance ministry’s loan sanctions data and the actual credit flow data from the Reserve Bank of India (RBI) indicates a discrepancy of more than ??4,000 billion.

Bankers penalize loan limits to borrowers based on a number of factors, including credit history and balance sheet strength. It stays on paper until the borrowers actually start taking actual credit off the limit and the banks start disbursing the credit amount.

Finance Minister Nirmala Sitharaman’s office tweeted on May 12 that public sector banks had sanctioned ??5,950 billion in loans between March 1 and May 8.

RBI credit flow data is available from February 28 to April 24 and shows gradual credit growth of ??1.77 billion between these two dates.

Granted, the RBI data is on outstanding loans (net of repayments), but since most banks have said that about half of their borrowers have opted for the three-month moratorium, it is unlikely that reimbursements have exceeded new disbursements. Other than that, while government sanctions data relates only to public sector banks, RBI data relates to all scheduled commercial banks.

According to Madan Sabnavis, chief economist, Care Ratings, in working capital loans, banks penalize a limit up to which one can borrow and the penalties are typically 1.5 times actual disbursements. However, in the current scenario, borrowers do not want a pile of debt in the absence of real cash flow and prefer to wait for clarification on the lifting of the current foreclosure, he said.

“The point is, you don’t want to borrow because there is little or no production activity and the customer is unable to sell the finished products. The borrowers know that if they take the money just because the banks give an extra 10%, that doesn’t mean they’ll be able to sell the goods, ”Sabnavis said.

Public sector banks have been at the forefront of covid-19 lending and have, since the lockdown, provided emergency lines of credit to small businesses, retail borrowers, and even businesses. The State Bank of India (SBI) was the first to announce a line of credit of up to 10% of borrowers’ existing working capital loans.

Credit growth has slowed for several quarters and stood at 6.66% year-on-year growth as of April 24. In fact, between March 27 and April 24, outstanding loans decreased by ??1.03 trillion, down 1% over the same period.

A senior banker at a large public sector bank said that while the tendency is to postpone taking loans during foreclosure, not all borrowers are against the idea. He said some small businesses apply for working capital loans to pay staff salaries and manage partial operations.

“Overall I would say customers don’t want to borrow now but keep their lines of credit in place. They might need the money immediately after the lockdown and want to keep the sanctioned limit in place, ”the banker said.

In the retail segment, the banker said, customers only get a certain amount of personal loans because home loans, the largest segment in this category, are currently on the back burner.

Mortgage loans represent more than half of total loans to individuals and amount to ??13 38 trillion as of March 27, according to RBI data. Total loans to individuals amounted to ??25.53 trillion over the same period.

Bankers said they were under pressure from their superiors and the government to sanction emergency credit lines. However, some experts believe that the increased perception of risk by banks also leads to a delay in disbursements.

Rajat Bahl, rating director at Brickwork Ratings, said it was more of a refusal by banks to disburse loans than a reluctance by borrowers to avail themselves of the credit. “Even after the limits have been sanctioned, some lenders do not disburse them due to lack of documentation, which makes it difficult for borrowers who need the money. In addition, they are quite picky and are willing to give loans only to the highest rated borrowers, ”Bahl said.

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Troy M. Hoffman