Commercial credit falls 2.6% Q-o-Q in June qtr amid slowing economy and rising delinquencies

The slowing economic growth, rising delinquencies and hamstrung non-banks have impacted the flow of credit to the commercial sector. The credit flow to the commercial sector showed a marked slowdown in the June quarter, as non-banking financial institutions faced a severe liquidity crunch.

According to the seventh edition of the TransUnion CIBIL MSME Pulse Report, the commercial credit growth slowed in the June quarter, after growing steadily for several years.

While commercial credit grew 10.4% in the June quarter, it declined by 2.6% sequentially. The total on-balance sheet commercial lending exposure in India declined to `63.8 lakh crore in June 2019 from Rs 65.5 lakh crore in March 2019.

While slowing economic growth has played a role, other factors like funding crunch faced by NBFCs and deteriorating asset quality have also contributed to the flow of credit to the commercial sector. Over the last five years, non-banks emerged as a big source of funding to the commercial sector. With the sector facing liquidity crunch following defaults by some companies, NBFCs have not been able to disburse credit in the manner in which they were doing earlier.

After gaining market share from public sector banks for several years, the share of NBFCs declined for the first time in the June quarter. In the first six months of 2019, NBFC credit outstanding showed a 1% decline compared to the same period last year. Credit offtake at non-banks grew 17.9% between January 2018 and June 2018.

Another factor that could have also contributed to the slowing credit flow is an increase in the absolute non-performing asset (NPA) amount. The NPA rate for NBFCs escalated to 5.9% for the quarter ended June 2019, from 4.4% in June 2018.

The slowdown in credit growth, along with the ongoing crisis the NBFC industry is facing, contributed to the decline in asset quality for the segment.

Asset quality deterioration too was elevated in the June quarter. The report said the NPA rate surged to 16.1% in June 2019 from 15.5% in March 2019. Delinquencies in commercial lending had peaked to 17.2% in June 2018. In relative terms, this year is still better.

NPA rates in micro and SME segment have remained range bound between 8.5% (June 2018) to 8.7% (June 2019) and 10.6% (in both June 2018 and June 2019), respectively, over last one year. Growth in credit exposure is proportional to gross NPA amount in micro and SME segment and therefore the NPA rate remains range bound.