Banking Central | Bank credit picks up momentum. But where is the money going?

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Let's try to track the trend in bank credit flow in this edition of Banking Central. Data suggests that bank lending is picking up in some pockets that are seeing recovery and drawing relief from easing asset quality situation. Overall, bank credit has grown by around 15 percent in 12 months ending March 2023, compared with just around 10 percent over the last year.

So, where is the bank money going mainly?

An analysis of the RBI sectoral credit growth data suggests that banks have been aggressively growing lending exposure to individual borrowers. For instance, within personal loans, bank lending to consumer loans have been growing at a rapid pace. In the 12 months ending March 2023, the segment has grown by 35 percent, while in the previous 12 months, the loans grew by 60 percent.

Credit card outstanding grew 31 percent in the 12 months ending March compared with just 13 percent a year ago. A big jump is seen in the education loan portfolio too which grew by 17.1 percent compared with around 6 percent in the year-ago period.

Why banks are fond of retail loans? These are relatively safer when it comes to asset quality, meaning most borrowers typically pay back on time. In the last two decades, banks have seen significant defaults from large-ticket corporate loans. This is one reason why banks are shifting in a big way to individual loans.

Apart from these categories, where else bank loans have shown a visible growth?

Take a look at the vehicle loans segment. Here, bank exposure grew by 25 percent in 12 months ending March compared with a little over 9 percent in the previous year. Agriculture too has seen rapid increase in the inflow of bank money with over 15 percent credit growth in 12 months ending March, 2023 compared with 10.9 percent in the comparable period previous year.

So, which sectors took a beating?

As I mentioned above, banks are exercising a lot of caution on corporate loans and are probably limiting the exposure to top-quality big companies.

If one looks at the overall credit portfolios of banks, among the major groups, loans to industries have slowed down with the exception of large companies. The credit growth to industries slowed down to 5.7 percent in the period under review compared with 7.5 percent in the previous corresponding period.

Within industries, lending to micro and small companies and medium-sized companies grew at 12.3 percent and 19.6 percent, compared with 23 percent and 54.4 percent in the previous year. When it comes to large companies, there is a slight improvement in loan flow from 2 percent to 3 percent in the period under review.

What next?

Numbers reported by both state-run banks and private sector lenders for the fourth quarter suggests that most banks expect a significant pick-up in credit growth in this fiscal year, continuing the trend seen in the post-pandemic phase. Bank of India, which reported earnings last week, said it expects loan growth to be in the range of 11-12 percent in the fiscal year 2024. Similarly, Union Bank of India which too reported its January-March quarter numbers last week, said it should see credit growth in the range of 10-12 percent this fiscal year. The trend is largely in line with big private sector banks which have reported numbers so far.

Much will depend up on the evolving growth situation influenced by both global and domestic factors. High interest rates, if stays for long, could further hurt borrowing capacity of small companies. The key variables to watch ahead will be trajectory of inflation and stability in global markets. Banks are likely to focus more on retail loans in the near-term as a safer bet and take a selective approach while looking at corporate loans.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.