Home / News / India /  Retail lending tells yet another slowdown story

Are bank retail loans still going strong?

The year-on-year growth in retail loans offered by banks in June 2019 was 16.6%. In June 2018, bank retail loans had grown by 17.9%. The year-on-year growth in bank retail loans has slowed down, although not by much. The trouble is this does not give us the complete picture. Take a look at the chart above. The quarter-on-quarter growth in bank retail loans during April-June this year was just 1.49%. This basically means that total outstanding bank retail loans were 1.49% higher as on 30 June 2019 in comparison to 31 March 2019. This was the slowest sequential growth in bank retail loans in four quarters.

Why is slow growth a cause for concern?

Since the start of this fiscal, non-banking finance companies (NBFCs) have been finding it tough to raise money, in order to give out loans. Banks carry out retail lending but so do NBFCs, which give out retail loans such as home loans, vehicle loans and personal loans. Due to a crisis at NBFCs such as Dewan Housing Finance Corp. Ltd and Infrastructure Leasing and Financial Services Ltd, most of the others are finding it difficult to raise money. Thus, many of them have had to go slow on lending activities. Given this situation, overall retail lending by NBFCs plus banks has slowed down.

Is there any more evidence on this?

Bank lending to NBFCs during April to June has contracted by around 1%. This basically means that NBFCs now don’t have as much money to lend as they had in the past.

(Graphic: Paras Jain/Mint)
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(Graphic: Paras Jain/Mint)

What is the implication of this situation?

Under the services sector, banks lend money to NBFCs, which in turn lend it out further. During 2017-2018 and 2018-2019, bank lending to NBFCs jumped 26.9% and 29.2%, respectively. Total bank lending to NBFCs jumped from 3.9 trillion to 6.4 trillion. This helped the non-banks exponentially grow their retail lending as well. But in the present situation, with funds from the banks drying up and mutual funds going slow on lending to NBFCs, they can’t lend money even if there is demand for loans.

How does this affect the broader economy?

For the broader economy this means that retail loans of NBFCs as well as banks are growing at a slower pace than in the past. This is another good reflection of the Indian economy slowing down. When prospective borrowers do not take loans, it means that they are not confident about the economic future and their ability to pay EMIs to repay the loans. That’s precisely what is playing out in India.

Vivek Kaul is an economist and the author of the Easy Money trilogy.

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