India’s mega cities, rural centres are dragging loan growth down for banks
Rural centres saw credit growth drop sharply to 11.8% in the September quarter compared with 14.8% in the year ago period, disaggregated data from the RBI showed. Even semi-urban areas showed a marked deceleration.
The progressive unlocking of the economy has helped parts of business activity revive. But India’s lenders have not been able to shore up their loan growth.
In contrast to the positive narrative from agriculture, credit growth from rural banking centres have decelerated the most in the September quarter. Rural centres saw credit growth drop sharply to 11.8% in the September quarter compared with 14.8% in the year ago period, disaggregated data from the Reserve Bank of India (RBI) showed. Even semi-urban areas showed a marked deceleration. ( See chart)
As such, overall credit growth slowed to 5.8% in the September quarter from 6.4% in the June quarter. But the source of this sharp deceleration is not just rural but India’s mega cities as well.
Year-on-year loan growth from metropolitan centres dropped to 3.6% in the September quarter from 5.1% in the June quarter. The fact that this lower growth comes on the back of an already slowing trend should worry us more. The loan growth in September quarter of FY19 had also decelerated to 5.3% from 7.1% in the June quarter.
The progressive unlocking hasn’t really enthused residents of cities to increase consumption. But why should this worry us?
Metropolitan centres account for a bulk of loan offtake. Their share in total credit was 62% while urban centres contributed to 16% of loans. They also account for half of the bank deposits but here the growth has been stable, even better.
The number of banking centres in mega cities are less than those of rural and semi-urban areas. But the share in business is large perhaps due to most businesses headquartered in them. According to RBI data, only 19% of reporting offices are in metro cities while another 18% in urban centres. More than half of banking centres are in rural and semi-urban areas. (See chart)
In a nutshell, this means that geographies that have the largest share in loans are yet to revive fully. As such, analysts expect loan growth to be low single digits for FY21. The revival of bank credit growth hinges on mega cities speeding up their activities.
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