- NBFCs are struggling with liquidity and the impact through them to bank balance sheets would be felt
- The lockdown has shuttered restaurants, hotels and tourism to enforce social distancing
Banks have lent more to sectors that have emerged as the most vulnerable to the lockdown imposed for curbing covid-19 spread, shows data from the Reserve Bank of India (RBI).
As of February, loans to commercial real estate grew by 15.13% year-on-year while those to tourism, hotels and restaurants grew by 16.95%. As the adjoining chart shows, credit growth rates were low a year ago for these two services.
The lockdown has shuttered restaurants, hotels and tourism to enforce social distancing. With malls, multiplexes and non-essential stores closed, commercial real estate has taken a massive hit. Add the fact that work from home has been adopted, offices too have been largely closed. It is obvious that commercial real estate is one of the biggest casualties of covid-19 and recovery won’t be quick.
The fact that loans to this sector had picked up of late is going to bother banks. Analysts have already pointed out that asset quality would be hit in the wake of the lockdown.
To be sure, the share of commercial real estate in total credit is small at 2.5%. That of tourism, hotels and restaurants is even smaller at 0.5%. Even so, these segments and most services contribute heavily towards employment. Ergo, cascading effects onto individual incomes and therefore onto personal loans cannot be overlooked by banks.
Meanwhile, on an aggregate level, credit growth to services has decelerated sharply to 6.93% from 23.67% a year before. Loans to manufacturers too have shown subdued growth, bringing the overall non-food credit growth down.
Loans to non-banking financial companies (NBFCs) grew by 22.29%, less than half the pace of growth a year back. That said, NBFCs are already struggling with liquidity issues, which now gets more complicated due to the lockdown. The impact through them to bank balance sheets would be felt.
Indeed, there is no sector of the economy untouched by the virus outbreak. But some corners are more painful than others. Unfortunately, Indian banks seem to have increased lending to these painful corners. As the lockdown to prevent covid-19 spread shrinks banking activities to the mere basics, the country’s lenders are bracing for a quite a hit on their assets.
