The incremental credit flow from banks, commercial papers (CPs) and corporate bonds outstanding could rise by Rs 7.3-9.7 trillion during FY2021. This will be a sequential growth of 22-61% over FY2020, albeit on a low base of Rs 6.0 trillion of FY2020. The incremental credit flow during FY2020 declined by 64% from a level of Rs 16.79 trillion during FY2019.
Of the incremental credit flow of Rs 7.3-9.7 trillion during FY2021, we expect banks to account for 6.0-7.0 trillion of incremental credit growth and the bank credit outstanding to increase to 109.2-110.2 trillion by March 2021. The corporate bonds volume outstanding is expected to increase by another Rs 1.5-2.5 trillion to Rs 33.7-34.7 trillion account by March 2021. The volume of CPs outstanding is however expected to remain rangebound at Rs 3.3-3.7 trillion by March 2021 as compared to outstanding volume of Rs 3.5 trillion as on March 31, 2020, thereby translating in limited incremental growth from this source.
Commenting on the above trends, Mr. Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA says, “The sharp decline in incremental credit during FY2020 was driven by slowing economic growth as well as heightened risk aversion among lenders. Nonetheless, the expectations of an increase in incremental credit flow during FY2021 are driven by increased credit demand amid weakening cash flows of borrowers because of Covid-19 induced stress; as well as capitalization of interest for the period of moratorium offered by lenders. Lower external commercial borrowings (ECB) coupled with TLTROs could also drive up domestic credit growth.”
The incremental credit growth from banks stood at Rs 5.9 trillion and stood weak during FY2020 as compared to Rs 11.9 trillion during FY2019 as slowing economic growth curtailed the fresh credit demand apart from increased risk aversion among lenders. Amid higher risk aversion amid domestic lenders, many corporates and Non-banking financial companies (NBFCs) sought RBI approval for overseas borrowing thereby reducing demand from domestic sources. ECB approvals rose 70% on YoY basis during trailing twelve months (TTM) of February 2020 and stood at US$ 58.2 billion as compared to US$ 34.2 billion during TTM of February 2019. The risk aversion of foreign investors towards emerging economies will however increase because of Covid-19, and we expect, the ECB approvals could decline by US$ 15-20 billion in FY2021, thereby creating additional credit demand from domestic sources. Additionally, ICRA also expects that the moratorium on loan repayments and interest will require banks to capitalize this interest to borrowers account, as they are unlikely to be in position to pay accumulated interest for moratorium period in one go, thereby pushing up bank credit. All these above factors could create additional demand for bank credit because of Covid-19 induced cash flow mismatches, even as fresh credit demand for capital expenditure will remain muted.
The corporate bonds outstanding is estimated to have grown by Rs 1.5 trillion to Rs 32.2 trillion during FY2020 translating in a muted YoY growth of 5% as compared to a growth of Rs 3.3 trillion during FY2019 to Rs 30.7 trillion or a YoY growth of 11.9% in FY2019. The slowdown in corporate bond outstanding growth is attributable to higher risk aversion towards NBFCs (which account for ~60% of corporate bonds issuances), leading to ~15% YoY decline in their issuances during FY2020. Further, changes in the regulation of liquid mutual funds (MFs) such as requirements for a higher share of liquid investments in assets under management (AUMs), the imposition of exit-load, and mandatory listing requirements for CPs investments made by MFs resulted in a decline in AUMs of liquid funds and CP volumes. The CP’s outstanding volume declined by 28.7% on YoY basis or Rs 1.4 trillion during FY2020 to Rs 3.5 trillion as on March 31, 2020. We expect the CP volumes are unlikely to witness any material increase in volume outstanding and will remain around Rs 3.3-3.7 trillion by end of FY2021, thereby translating in incremental YoY growth of -4.2-7.4%.
“Though the RBI announced TLTROs could support the corporate bond issuances in FY2021, however recent event of winding-up of debt schemes by a large MF could adversely impact the AUMs of debt MFs and could adversely impact the bond issuances and CP volumes as MFs have emerged as large investor segments in these instruments,” added Mr. Srinivasan
Table 1: Growth in domestic credit sources – Bank Credit + Corporate bonds and CPs
Source: RBI, SEBI, ICRA Research estimates
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