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Home / Industry / Banking /  The fine print in the bank credit recovery

One key metric of a reviving economy in current times is bank credit. Indians’ appetite to take loans has been sluggish for a few years, weakened further by the pandemic, but is now finding its way back. The Reserve Bank of India (RBI) recently released segmented data on the trend for the full fiscal year 2021-22. The revival looks patchy, with corporates holding their capex plans and rural demand growth faltering. Here’s what the data shows on the flow of credit across states and various segments.

1. States’ show

In 2021-22, outstanding credit across India rose 10.7%. But since it was bumped up by base effect, we need to look over a longer period to assess growth. Loan sanctions grew by an average 7.3% per year (compound annual growth rate) in the three years ending March 2022, slower than the double-digit growth in the preceding two years. However, the positive news is that most high-impact states have grown faster than the national average, RBI data showed.

The high-impact states are the 12 largest state economies, whose combined growth can substantially lift India’s growth. They made up 49% of the 119 trillion of outstanding credit as of March 2022. Eight of them saw better credit growth in the three-year period than India. Maharashtra, India’s wealthiest state, and Gujarat, were major exceptions to this trend. All regions, except the west and north, posted above-average growth.

2. Rural vs urban

Credit growth in the rural sector had slowed down considerably in 2016-17 and 2017-18, possibly crippled by demonetization. But in each of the last four fiscal years, rural credit has outpaced the all-India figure, clocking 12.1% on average per year. As a result, its tiny share in overall credit is inching up and that of the metropolitan segment is shrinking.

However, the rural growth rate slowed again to 11.1% in 2021-22, even as other segments exhibited strong base effects. The metropolitan segment grew 9.2% after a meagre 1.4% growth in 2020-21. The urban segment, which includes the semi-urban segment, grew the fastest, at 13.7%.

“The loss of jobs and incomes in the unorganized sector has been unprecedented," said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. “This explains the sluggish credit growth in the rural economy. However, now there are green shoots of recovery in the rural economy."

3. Cautious businesses

Credit is availed by both corporations and households, and the latter are doing better as business sentiment stays cautious. Demand for corporate credit saw some recovery last fiscal, growing 5% after two successive contractions. But growth in household loans, which claim a greater share than corporations, improved even more, from 10.9% to 13.3%.

The trend for both categories shot up with each successive quarter of 2021-22.

“Industry has been deleveraging during the last two to three years, and demand has also been sluggish," said Vijayakumar, explaining why India Inc. could be falling behind. While demand has been slowly picking up, a challenging geopolitical landscape, rising interest rates and the depreciation in the rupee could throw a spanner in capital expenditure revival. Meanwhile, the share of big-ticket loans (above 100 crore) marginally dropped between June 2021 and March 2022, and that of smaller-ticket loans (up to 25 lakh) inched up from 32.9% to 33.1%.

4. PSBs trail

Private sector banks are increasingly slugging it out for a greater pie in credit offtake. Public sector banks saw a quarter-on-quarter loan recovery of 4.9%, while private ones led with 6.5% growth. As private banks have consistently outpaced state-owned banks, their share in overall credit has steadily risen from less than 30% five years ago to 38% now.

The fledgling recovery is likely to continue. High-frequency data from the RBI showed that bank credit as of 17 June was up 13.2% year-on-year, albeit on a low base. Rising bond yields could also help push borrowings towards the banking system.

“This recovery is sustainable as it is more or less linked to the general level of economic activity," said Joseph Thomas, head of research, Emkay Wealth Management. He believes fears of a global recession may be a bit overdone at this point in time, though the possibility of a slowdown in credit growth cannot be ruled out.

5. Industry split

Agricultural and personal loans are holding up well, but loans given to industry are slow in recovery. Credit outstanding in the agriculture segment grew 5.7% sequentially in the March quarter, while growth in the personal loan space was 6%. Both have picked pace over the last year.

“Bank credit growth has been occasioned by a number of factors, but the contribution of retail loans in this is quite significant," Thomas said.

Industry loans have seen some moderation, slowing from 4.2% in the December quarter to 3.4% in the March quarter. Vijayakumar said sectors such as telecom, pharma, energy, and export-oriented segments have been doing well, but micro-, medium and small sector enterprises had been adversely impacted.

As demand picks up and grows impressively in some segments, a rise in interest rates will be absorbed to an extent, experts said. However, in an event of unabated inflation and tighter monetary policy, credit demand could again suffer.

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