To know how the economy is faring at a given point in time, look at the trends in bank loans to key sectors. Higher the growth in loans, more the activity in that sector.
Right now, bank lending to almost every sector is shrinking. And for a simple reason. Demand is weak, so companies do not want to invest in capacity expansion. Instead they are doing everything possible to strengthen their balance sheets by repaying debt. The recent cut in corporate tax rates boosted the bottom line of many companies, and industry watchers say many companies have chosen to retire debts with the savings.
And when they need funds, companies first use their own funds — if the business is doing well — or turn to markets where money is cheaper. Banks are no longer the first port of call. This is not something new; bank loans to corporates have been slowing for almost two years. But the economy showing no signs of revival, credit growth is sliding rapidly.
A grim picture Practically there is no lending happening to industry; even the existing exposure has shrunk in sectors like manufacturing. There is much slower lending to housing and auto segments. Till about a year-and-a-half back, banks were facing stiff competition from non-banking finance funds, which were flush with funds. Not any longer, as most NBFCs are now struggling for capital and have been paring down their loan books. Still, that has not translated into big gains for banks.
Growth in overall bank lending, as on December 20, 2019, stood at 7.1 percent at Rs 99.47 lakh crore, lower than previous year. Deposits typically grow at a faster pace than credit. This time, it grew a tad above 10 percent in the fortnight ended December 20.
That’s indicative of the lull in demand on the ground, especially with respect to projects involving medium and small sized companies. Also, the bigger companies -- the AAA rated ones -- are typically less dependent on banks for money; they could easily tap the bond market. That’s not the case with smaller ones struggling for survival capital.
What are the numbers? Bank lending to medium sized companies, which are the backbone of India’s manufacturing story, has contracted (meaning negative growth) by 3.6 percent in the eight months ending November against 1.4 percent year-on-year. That’s till when sector-wise credit growth data is available on the Reserve Bank website.
Loans to medium-sized companies contracted 2.4 percent YoY (12 months to November 2019) against a growth of 11 percent in the preceding year. A similar trend is also seen for large companies, where loans have contracted 4 percent against a marginal growth of 0.8 percent last year.
This, as mentioned above, could be partly due to bigger ones moving to money market to tap bonds, where money is cheaper than bank loans.
Look at manufacturing. Bank loans have contracted 3.4 percent so far in FY20 as against a negative 2.7 percent YoY. Manufacturing has been struggling despite the government’s efforts to boost local production through schemes like ‘Make in India’ and easing of red tape.
What about housing? Here again, loan growth in the current fiscal has slowed to 9.9 percent from 10.6 percent YoY. To cut a long story short, if bank lending growth trends offer any clue, there is very less economic activity on the ground at this juncture. Everything in an economy is linked to real demand on the ground, which is clearly absent at this juncture.
So where is the money going? But the picture is not all gloomy. There are three segments which appear to have bucked the trend. These three are unsecured credit card loans, loans to NBFCs and micro-credit (loans to MFIs). But, as a percentage of total loans, these three are insignificant. Hence the growth here can’t be taken as indicative figures to discuss the broader loan growth.
Credit card loans are still growing at about 20 percent, although the pace has come down when compared with 24 percent YoY. Similarly, NBFC loans are growing at around 14 percent in FY20, nearly half the pace they grew at last year.
One major trend one shouldn’t miss is the sharp jump in micro-credit, which has grown at around 45 percent YoY. These are the loans banks give to microlending institutions. Why there is a sudden jump here? Last year, there was a scare in the NBFC market after the collapse of IL&FS. Banks put a temporary stop to the lending to shadow banks. This flow has resumed in FY20 and is seeing a big jump.
What could be done? Banks are not lending to companies and individuals not because of a liquidity problem but due to lack of demand. “There are very few quality projects looking for bank money even in the form of working capital. Capacity utilisation is down to 70 percent in many cases,” said Siddharth Purohit of SMC Global Securities.
The question ultimately comes to the purchasing power and intent of the consumer. Consumer confidence has taken a hit in a slowing economy. With no demand for goods and services, companies are struggling to face the demand slump.
The bleak scenario on the unemployment front has further weakened the consumer confidence. Going by the latest consumer confidence survey released by the RBI, consumer confidence has fallen to the sharpest level since 2014. The problem here is that even if the government puts more money in the hands of people in the form of freebies and cash distribution, this typically goes to unproductive consumption expenses and not capital creation. The Centre’s decision to spend more on infrastructure and generate jobs/spending is a step in the right direction, but can yield results only in the long-term. There aren’t quick solutions to the prevailing demand slump.
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