Beware the mirage of health in credit growth
A sure way to fight baldness is to hasten hair growth. At a time when deep haircuts on stressed loans threaten to leave bankers bald, the best cure is to hasten credit growth. And it seems that loan growth has finally bounced back to double digits.
The 10% growth in non-food as of November should mean that all the oiling through interest rate cuts and gelling through pruning of spreads has resulted in stoking growth.
But there is a catch, as Chart 1 shows. Recall that in November 2016, the government had initiated demonetisation, which led to 86% of the cash with the public being snatched away. Right in the middle of the exercise were bankers who had to focus all of their man-hours into collecting currency notes from Indians. Work shifts were filled with swelling the liability side of the balance sheet, leaving no time to market the asset side. In that month, no loans were given and the banking sector loan book shrank 1.66% during the two demonetisation months.
So the impressive 10% growth this year is on top of this hole that demonetisation left. What would therefore make more sense is to look at month-on-month growth in loans and this doesn’t paint a rosy picture. In the first eight months of the current fiscal year, banks have disbursed close to Rs1 trillion worth of loans. Since comparing this with an abnormal period of 2016-17 is futile, let us juxtapose this with previous years. During the same period in 2015-16, the loan book had expanded by Rs2.8 trillion and Rs2.5 trillion in 2014-15.
Now we know that loan growth is not fantastic, but perhaps companies are borrowing from other sources such as the debt market? Chart 2 shows this is not true either, as domestic bond issuances have hardly grown year-on-year. Net commercial paper issuance during April-November was Rs75,700 crore, down 39% from the corresponding period in the previous year.
In sum, manufacturers are not rushing to raise funds and this portends a slower recovery in private sector capital expenditure.
Bankers pinning for a credit growth recovery would do well to scale down their expectations for a fresh crop on their pate any time soon.