The incremental credit flow from banks, commercial papers (CPs) and corporate bonds outstanding could rise by ₹7.3-9.7 lakh crore during FY2021, albeit on a low base of ₹6 lakh crore of FY2020, according to ICRA.
The credit rating agency reasoned that among others, the credit flow will be driven by increased credit demand amid weakening cash flows of borrowers because of Covid-19 induced stress; as well as capitalisation of interest for the period of moratorium offered by lenders.
This will be a sequential growth of 22-61 per cent over FY2020. The incremental credit flow during FY2020 declined by 64 per cent from a level of ₹16.79 lakh crore during FY2019, the agency said.
Of the incremental credit flow of ₹7.3-9.7 lakh crore during FY21, ICRA expects banks to account for ₹6-7 lakh crore of incremental credit growth (FY20 estimate of ₹5.9 lakh crore) and the bank credit outstanding to increase to ₹109.2-110.2 lakh crore by March 2021 (from FY20 estimate of ₹103.20 lakh crore).
The corporate bonds volume outstanding is expected to increase by another ₹1.5-2.5 lakh crore (from the FY20 estimate of ₹1.52 lakh crore) to ₹33.7-34.7 lakh crore by March 2021 (against March-end 2020 estimate of ₹32.19 lakh crore).
The volume of CPs outstanding is, however, expected to remain range-bound at ₹3.3-3.7 lakh crore by March 2021 as compared to outstanding volume of ₹3.5 lakh crore as on March 31, 2020, thereby translating in limited incremental growth from this source.
Slow growth
Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA, observed that the sharp decline in incremental credit during FY20 was driven by slowing economic growth as well as heightened risk aversion among lenders.
“Nonetheless, the expectations of increase in incremental credit flow during FY21 is driven by increased credit demand amid weakening cash flows of borrowers because of Covid-19 induced stress; as well as capitalisation of interest for the period of moratorium offered by lenders.
“Lower external commercial borrowings (ECB) coupled with TLTROs (targeted long-term repo operation) could also drive up the domestic credit growth,” Srinivasan said.
Overseas borrowing
Amid higher risk aversion amid domestic lenders, ICRA said many corporates and non-banking financial companies (NBFCs) sought RBI approval for overseas borrowing in FY20 thereby reducing demand from domestic sources.
External commercial borrowing (ECB) approvals rose 70 per cent on year-on-year basis during trailing 12 months (TTM) of February 2020 and stood at $58.2 billion as compared to $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 $15-20 billion in FY2021, thereby creating additional credit demand,” the agency said.
Additionally, ICRA also expects that the moratorium on loan repayments and interest will require banks to capitalise 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 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.
Srinivasan said: “Though the RBI announced TLTROs could support the corporate bond issuances in FY2021, however the recent event of winding-up of debt schemes by a large MF could adversely impact the AUMs (assets under management) of debt MFs and could adversely impact the bond issuances and CP volumes as MFs have emerged as large investor segments in these instruments.”