The tale told by the bank loan numbers
The pickup in economic growth should lead to higher growth in bank credit
Data on bank credit growth tells us a lot of things about the economy. Sectors that are seeing an increase in bank loans are likely to be thriving while those where the quantum of lending has contracted will be doing badly. Which industries are getting the most credit? How strong is bankers’ preference for personal loans, given the mountain of bad loans in corporate lending? Some of the answers to these questions are seen in RBI (Reserve Bank of India) data on bank credit for 2017-18.
Consider industrial loans. Bank credit outstanding to the industrial sector went up by a pathetic 0.73% in 2017-18, after a contraction in the previous year. Simply put, bank loans outstanding to industry at end-March 2018 were lower than two years ago.
Within industry, loans outstanding to micro and small units were up 0.88% last fiscal year, after contracting in the previous two years. Contrast that to the growth of over 20% in loans to these units in 2012-13 and 2013-14. There has been a lot of talk about the distress in the small-scale industrial sector as a result of the note ban and the introduction of the goods and services tax (GST). The loan data seems to confirm this, although some of the shortfall may have been met by loans from non-banking finance companies (NBFCs).
Loans outstanding to medium-scale industrial units fell by 1.07% in 2017-18, after shrinking in the previous two years. The much-vaunted emphasis on MSME (micro, small and medium enterprises) isn’t working in the industrial sector.
Credit outstanding to large-scale industrial enterprises too has seen paltry growth of 0.78%, but at least these units have other sources of funds, including private placements, tapping the bond and equity markets, and borrowing from abroad.
Industrial sectors that saw their outstanding bank loans shrink during 2017-18 include infrastructure, cement and cement products, petrochemicals, fertilizers, paper and paper products, beverages and tobacco, jute textiles and sugar. Surprisingly, outstanding loans to agriculture and allied activities increased by a meagre 3.8% in 2017-18, far less than the 12.4% growth in the previous year. This is odd, as agricultural growth has been robust. There have been some reports of banks refusing to advance new loans until state governments clear the dues on farm waivers.
More than 90% of the total increase in non-food credit in 2017-18 was on account of personal loans and lending to the services sector. The largest contributors to growth in non-food credit were “other personal loans”, housing loans and loans to NBFCs—in that order. The share of personal loans in credit growth has grown from a mere 10.25% in 2008-09 to 48.56% in 2017-18.
While the services sector accounted for 41.8% of the growth in non-food credit last fiscal year, the fact is, about two-fifths of that was due to the rise in bank loans to NBFCs. Banks are increasingly using NBFCs to do their lending for them.
Among “priority sector” loans, what strikes the eye is the 33.4% contraction in export credit. Outstanding export credit has been falling since September last year, no doubt due to the disruption from GST and this has probably been exacerbated in recent months by the Nirav Modi scam. Perhaps the clampdown on letters of undertaking is taking its toll.
The bright spots in the priority sector are the rise in microcredit and the sharp rise in lending to micro and small firms in the services sector. The informal services sector seems to be in robust health, perhaps the reason why political leaders are extolling the virtues of pakora and paan shops. Advances to the weaker sections have seen much lower growth than in previous years, as have loans to priority sector housing.
Overall non-food credit went up by 8.4% in both 2017-18 and the previous year. What demonetization did to bank lending in 2016-17, GST did in the next year.
Of course, businesses, especially big companies, have other sources of funds. RBI’s latest Monetary Policy Report points out that flows from these non-bank sources to the commercial sector increased in 2017-18, notably from all-India financial institutions, housing finance companies, short-term credit from abroad and public issues.
What of the future? The pickup in economic growth should lead to higher growth in bank credit. What could drag it down is if lack of capital crimps lending by some public sector banks, if the tsunami of bad loans leads to too tight lending norms and if the spate of investigations becomes a witch-hunt, scaring bankers.
Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at firstname.lastname@example.org