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Agricultural finance has done rather well, growing at 10.6%, while credit to the services sector is up 6% y-o-y. Photo: Hindustan Times
Agricultural finance has done rather well, growing at 10.6%, while credit to the services sector is up 6% y-o-y. Photo: Hindustan Times

What the bank lending numbers tell us about the Indian economy

Lending to government and personal loans make up a bulk of bank lending, indicating the sorry state of affairs

Bank credit growth has been terrible—a mere 9.4% in the year to 10 July, the latest date for which numbers are available. Much has been said about it being perhaps the lowest in a decade. It looks even worse when we compare it with credit growth a year ago, when it was 13.2%. Studies have pointed to mitigating factors such as the fact that firms have tapped other sources of funding, such as borrowing from the money and bond markets at lower rates and from the relatively buoyant equity markets, particularly through institutional placements and from private equity. Some companies have resorted to asset sales to raise finance and repair their balance sheets. And bankers have pointed out that credit will not really grow until investment demand picks up. But, looking at bank credit alone, is growth really as bad as it looks?

When we compare bank credit growth across the years, we must also take inflation into account. That is because if inflation is not so high in a particular year, then the increase in prices for purchasing raw materials and other inputs will be lower for firms, which means their borrowings from banks, too, may also see lower growth. During the periods when inflation has come down substantially, such as in the last one year, relying on the nominal growth in bank credit alone as a measure of credit demand may not, therefore, be the right measure of credit growth.

What happens when we take inflation into account? Average consumer price inflation in the past one year (July 2014 to June 2015) has been 5.3%. That means, if we adjust for this level of inflation, real credit growth in the past year has been around 4.1%.

Now compare that with the year ago period. The average consumer price inflation was much higher between July 2013 and June 2014, at 9.5%. But bank credit growth, too, was higher at 13.2%, so real credit growth then was 3.7%. Real growth in bank credit, therefore, has been higher in the past one year than it was in the preceding 12 months. Not a great deal higher, but higher nevertheless.

That is hardly cause for congratulations though. The problem arises if we look a little deeper, at the composition of these loans. It’s all very well to say real credit growth is higher than before, but what exactly is being financed? We now have the numbers till the end of June and it’s not a pretty picture. The year-on-year (y-o-y) growth in bank lending to industry, for instance, is down to 4.1%, well below the average rate of inflation. This growth rate was 10.2% in the preceding 12 months. True, the corporate sector has the most opportunities for tapping alternative sources of funding, but note that the growth in bank credit to micro and small enterprises, which do not have access to these alternative sources, is a mere 4.9%, while credit to the medium-sized enterprises has contracted over the past year, even in nominal terms. Also, total loans outstanding to industry went up by 1.035 trillion in the past one year. Of this, almost three-fourths, 73.6% to be exact, was on account of an increase in lending to infrastructure. Concentration risk in industrial lending is very high for the banking sector.

Agricultural finance has done rather well, growing at 10.6%, while credit to the services sector is up 6% y-o-y. But it is personal loans that are the star of the show, growing by a respectable 16.5% from a year ago. What’s more, this comes on the top of a 15.2% growth in the preceding 12 months. Of course, it’s well known that personal loans have been propping up bank credit growth. But the question is: by how much?

The best way to answer that is to look at the contribution of the various sectors to the growth in non-food bank credit over the past 12 months. Personal loans contributed almost 40%, or two-fifths of this growth. Industry contributed one- fourth, or 25%, while the rest was shared between agriculture and services. Clearly, at a time when the demand for bank loans from industry is tepid, personal loans have emerged as a saviour for banks.

But the numbers on deployment of bank credit miss out on the biggest borrower of all—the government. Growth in investments by banks, almost all of it investments in government securities, has been growing at 15.4% y-o-y, far outstripping the growth in bank credit. Note that a year ago, the growth in these investments was a much lower 6.3%. In the past one year, while total bank credit expanded by 5.73 trillion, investment by banks in government securities has increased by 3.53 trillion. Clearly, lending to government and personal loans make up the bulk of bank lending activity at present. That says a lot about the sorry state of the economy.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are
welcome at capitalaccount@livemint.com

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