FY20-21 is an outlier in India's financial system with the onset of pandemic. One direct corollary of pandemic in FY20-21 was a distinct slowdown in bank credit growth that has also continued into FY21-22. Such low credit growth was a direct fallout of corporates rapidly de-leveraging by repaying high-cost loans through funds raised through bond issuances, says a report from State Bank of India (SBI).
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of SBI says, "Interestingly, taking advantage of a low term structure of interest rates, corporates are reducing their loan liabilities, to facilitate a lower finance cost. From the set of more than 1,000 listed entities, we observe that sectors such as refineries, steel, fertilisers, retail, and consumer durable have reduced their loan funds in the range of 13% to 67% in FY20-21."
The analysis by SBI shows that top-15 sectors, from more than 1,000 listed entities, reported more than Rs1.70 lakh crore of debt reduction in the pandemic year 2021. Refineries, steel, fertilisers, mining and mineral products and textiles alone reduced debt by more than Rs1.50 lakh crore during FY20-21. Simultaneously, primary issuance of bonds increased by 9%. This trend is continuing in FY21-22 also, it says.
Sectors where loan reduction of 20% or more were reported during 2021 include fertilisers, cement products, consumer durable and capital goods. Interestingly, SBI says, the 1,000 corporates, in aggregate, have also increased their cash and bank balance by around 35% in March 2021 compared to March last year suggesting conservative approach to conserve cash during uncertain times.
Further, SBI says, at present, corporate willingness for new investments remains low as the economy is still recovering from the devastating second wave. "Investment scenario is tepid as gauged by new investment announcements which saw 67% decline in FY20-21 as per Centre for Monitoring Indian Economy (CMIE). However, the same is reported flat as per Projects Today, where new announcements of Rs10.7 trillion were reported in FY21 as compared to Rs10.8 trillion in FY20. We are unable to account for this rapid divergence in numbers in investment announcements," it added.
However, it is true that order inflow position of two leaders Larsen & Toubro (L&T) and BHEL declined during last year. While L&T reported decline in order inflow by around 6%, BHEL reported a decline of 61% up to December 2020 compared with FY2020.
However, Dilip Buildcon, KEC International Ltd, Kalpataru Power Transmission Ltd reported growth in order flow position during FY20-21.
Dilip Buildcon majorly because of orders from road sector or mainly from National Highways Authority of India (NHAI) and Kalpataru' s growth largely driven from orders in transmission and distribution (T&D) business.
"Against this background, only fiscal policy can rekindle animal spirits at this juncture - monetary policy has little headroom," Dr Ghosh from SBI says.