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Decoding The Credit Puzzle
December 7, 2020

Opinion:  Bornali Bhandari,  Samarth Gupta, Ajaya K Sahu & KS Urs 


The importance of credit to an economy cannot be over-emphasised.


The NCAER Quarterly Reviews of the Economy (June & September) has detailed out the tsunami like effect of the novel coronavirus (SARS-CoV-2) on the Indian economy. Unlike the contraction in year-on-year (y-o-y) growth shown by majority of indicators like Index of Industrial Production, exports, imports etc., the y-o-y growth of non-food credit was positive. However the y-o-y growth rate fell from 6.7% in April 2020 to 5.1% in September 2020. It is usually opined that banks were or are still reluctant to lend due to high risk aversion. However, that may not be the complete story. Instead, NCAER Business Expectation Surveys (N-BES) carried out in June & September 2020 indicates that firms were neither taking credit nor were planning to do so. Therein lies the puzzle-is low credit uptake a reluctance on the part of financial institutions or absence of preference from firms. 


NCAER, one of India’s oldest think-tanks has been carrying out the N-BES on a quarterly basis since 1991 covering 500 to 600 firms across six cities of Delhi (North), Kolkata (East), Bengaluru & Chennai (South) and Mumbai & Pune (West).  Its platform is used to assess the impact of SARS-CoV-2 on firms for the last three quarters.


The NCAER Business Confidence Index (a measure of business sentiments computed from the N-BES) fell from 111.2 in 2019-20:Q3 to 77.4 in 2019-20:Q4 to 46.4 in 2020-21:Q1 before rising to 65.5 in 2020-21:Q2.  Sentiments regarding production and sales deteriorated and costs remained elevated in June. There were additional costs that firms incurred for providing food & transport of workers.  This means that working capital of firms especially micro, small and medium enterprises (MSMEs) would have been under pressure.


Under these circumstances, the Reserve Bank of India announced moratorium on payments of instalments and interest on working capital facilities in respect of all term loans in March for three months initially. This was further extended till the end of August, 2020.  In addition, the Government of India announced an Emergency Credit Line Guarantee Scheme (ECLGS) to Businesses/MSMEs from banks and Non-bank finance corporations (NBFCs) upto 20% of entire outstanding credit as on February 29, 2020. This has since been extended upto the end of this year.


What has been the usage of these measures by firms?

The N-BES finds that 39.3% & 49.6% of firms had paid interest on loans in Rounds 113 (2020-21:Q1; June) and 114 (2020-21:Q2; September), respectively. In Round 114, 29.3% of firms responded had that they were paying full interest on loans and 20.3% were paying partially. Clearly the moratorium policy was reasonably successful i.e. firms utilised this policy.


However in Round 113, only 17% of firms had responded that they had taken credit in the last three months. This number fell down further to 9.6% in Round 114 (Figure 1).  In Round 113, 23% of firms had planned to take credit for working capital and 8.4% for new investment.  Out of the 17% of firms who had taken credit in Round 113, 75% had faced moderate to severe issues in obtaining them.    


Not only uptake of credit but preference for credit also appears to have fallen between the two rounds. In June, about 31.6% responded that they plan to take credit in the next six months. But by September, we find that only 19.5% of firms planned to do so. (Figure 2)


There are differences across firm sizes as a smaller-sized firms were more likely to take loans (Figure 1) and were more likely to have plans for taking loans in the future (Figure 2).  Consistent with the overall trend, we find that the share of firms either taking loans or planning to take drops down between the two rounds across firm sizes.  


The ECLGS scheme was drafted as a measured response to the expressed need and economic intuition of helping firms tide over the bad times. However, N-BES suggests that demand for credit was muted in the early days and has become more subdued over time. The ECLGS scheme has been relatively underutilised. 


The lower credit offtake coincides with the period when demand sentiments of firms improved between Rounds 113 and 114. 40.2% of firms expected production to increase in next six months in Round 114 compared to 16.2% of firms in Round 113. The corresponding numbers for domestic sales were 49.5% in Round 114 and 15.4% in Round 114. At the same time, 46.3% of firms reported ‘severe’ difficulties in getting dues on time. Both factors should have spurred a demand for credit but instead we see a dampening. The dampening could be explained by improvement in receipts, which should have improved working capital.  There could be other non-monetary challenges faced by firms while seeking credit. For e.g.; cumbersome paper work may repel smaller firms from availing credit. Approximately 47% of firms had reported ‘severe’ difficulties in accessing loans in Round 113.


The credit behaviour of firms needs to be understood and resolved in a systematic manner. The importance of credit to an economy cannot be overemphasised.


Bornali Bhandari is a Senior Fellow, Samarth Gupta & KS Urs are Associate Fellows and Ajaya K Sahu is a Senior Research Analyst at NCAER. Views expressed here are personal.


Published in: QRIUS, December 07, 2020