COVID-19 has severely impacted bank credit flow to multiple sectors and this is reflected in the latest data from the Reserve Bank of India (RBI) on sector-wise credit growth.
On a year-on-year basis, overall bank credit growth decelerated to 5.8 percent in September this year as compared with 8.1 percent in the year-ago period.
Most worryingly, credit growth to industry recorded ‘nil’ growth in September 2020, as compared with 2.7 percent growth in September 2019, the RBI said.
Bucking the downtrend, credit growth to the services sector accelerated to 9.1 percent in September 2020 from 7.3 percent in September 2019, the RBI said.
Within this sector, credit to ‘computer software’, ‘trade and tourism', and 'hotels & restaurants’ registered accelerated growth in September 2020 vis-à-vis the growth in the corresponding month of the previous year, the central bank said.
Personal loans registered a growth of 9.2 percent in September 2020 as compared with 16.6 percent growth in September 2019. Within this sector, vehicle loans continued to perform well, registering accelerated growth in September 2020 vis-a-vis the growth in the corresponding month of the previous year, the RBI said.
If one looks closer in the industry group, loan growth to micro and small companies contracted by 0.1 percent during the period under review, where there is a sharp jump is seen in percentage terms in the loan flow to medium-sized companies at 14.5 percent. But this also on account of the low base last year.
In absolute terms, the total outstanding loans to medium-sized companies grew to 1.2 lakh crore from Rs 1.04 lakh crore, just an increase of Rs 15,000 crore.
To large-sized companies, loan growth contracted by 0.6 percent as against a growth of 3.4 percent in the year-ago period. The services sector, as mentioned earlier, has bucked the downtrend.
Personal loan growth slowed with almost all segments including consumer durables (22.3 percent this year Vs 68.8 percent last year) and housing loans (including the priority sector) being the worst hit with growth falling to 8.5 percent from 19.3 percent.
Why credit growth plummeted?
The economy was already on a downtrend even before COVID-19. But with the onset of the pandemic, the situation has worsened further. A combination of factors including massive job losses and salary cuts impacted demand.
Also, high risk aversion on the part of banks played a role. Banks weren’t willing to lend to who they perceived as high-risk borrowers. The government’s credit push to MSMEs under a government-guaranteed scheme helped to some extent.
Banks are hopeful that credit growth will pick up gradually as the economy opens up and consumer demand improves. Even then credit growth revival to industries is unlikely happen soon as the recovery is projected to be delayed.
Indian economy is likely to contract by 9.5 percent in the ongoing fiscal year as per the estimates put out by the Indian central bank
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