A slowing economy and impact of COVID-19 outbreak have severely affected bank credit growth. On a year-on year, basis the non-food credit growth slowed to just 6.8 percent as of May 22, 2020, compared to 11.4 percent in the previous year. So far in this fiscal year, growth has actually contracted by 2 percent.
Demand for retail and corporate loans was hit hard after COVID-19 outbreak forced the government to announce a nationwide lockdown in the last week of March. But credit growth had taken a severe hit even before that, in line with the slowdown in economic growth in Asia's third largest economy.
Credit to industries slowed to just 1.7 percent on a y-o-y basis as on May 22 as against 6.4 percent in the 12 months before that. In this fiscal so far, bank credit to industries contracted by 1.5 percent.
These figures are according to the latest data released by the Reserve Bank of India.
Among the industry group, loans to large industries grew just 2.8 percent as against 7.4 per cent last year while that to medium sized companies contracted by 5.3 per cent compared with a growth of 3 percent in the previous year. Loans to micro and small companies contracted by 3.4 percent compared with a growth of 1.1 percent. Loans to agriculture and allied activities too slowed to 3.5 percent in the 12 months ending May 22 as against a growth of 7.8 per cent in the year ago.
The slowdown in credit growth affected the personal loans segment as well. Personal loans stood at at 10.6 percent for the 12 months ending May 22 as against 16.9 percent in the previous year. In that segment, housing loans grew 13 percent as against 18.7 per cent while vehicle loans grew at 6.3 percent as against 5.7 percent in the year ago period.
Banks have slowed lending not because of liquidity issues but due to general slowdown in the demand situation. The economic uncertainty has forced companies to shelve their expansion plans and preserve capital. Hence, there is not much demand for corporate loans.
With rising job losses and pay cuts having an adverse impact on consumer sentiments, retail borrowers too have put on hold their buying plans. With lockdown rules easing and economic activities picking up, banks expect improvement in bank credit growth in the months ahead.