The outstanding non-food bank credit rose to Rs 82.04 lakh crore in January, a growth of 13 percent year-on-year (YoY), as per data released by the Reserve Bank of India (RBI) on February 28.
While the banking system credit growth has gradually inched up to mid-teens, nominal GDP growth (a sum of real GDP growth and inflation) has trended downwards in the recent quarter to around 9 percent. Real GDP growth in Q3 FY19 moderated to a six quarter low of 6.6 percent, while Consumer Price Index (CPI) based inflation has fallen to a low of around two percent.
That said, credit growth, comfortably in excess of nominal GDP growth, is definitely a positive trend. Let’s take a closer look at what’s driving this growth.Sharp growth driven by lending to NBFCs
The latest credit growth is broad-based, with credit to services continuing to lead the growth, rising 24 percent YoY.
Within services, credit to non-banking financial companies (NBFCs) grew a whopping 48 percent. While bank credit to NBFCs has been accelerating over the last 18 months, thanks to recent steep growth, the share of NBFCs in bank credit touched a record high of 6.7 percent as in January. The spurt in credit to NBFCs reflects the bid to provide funds to NBFCs in the aftermath of the liquidity crisis that engulfed the sector since September last year.
To ease liquidity situation and enable NBFCs to raise funds from banks, RBI increased concentration limits for banks’ exposure to individual NBFCs, including housing finance companies (HFCs), to 15 percent from 10 percent. The measure created more headroom for banks on lending to NBFCs.Credit to industry expands but still remains sluggish
Credit to industries has been the main culprit behind weak credit growth numbers in the past 7-8 years. From expanding at over 20 percent in FY11, credit to industry has seen contraction and flattish growth in recent years. Though sluggish, it expanded 5 percent YoY in January.
Industrial credit growth is showing signs of a revival after a marked share loss in outstanding bank credit. The recovery is corroborated by increase in capacity utilisation from 74.8 percent in Q2 to 73.1 percent in Q1, as per RBI data.
However, the latest monetary policy statement clearly alluded that dark clouds seem to be gathering over the horizon. High frequency indicators suggest that the pick-up in investment in the first half of FY19 may have lost some strength in the second half and considerable uncertainty shrouds the prospects of an improvement in private investment, especially in new capacity addition.Healthy growth in retail loans driven by housing loans
Housing loans, which constitute around 52 percent of personal/retail loans, saw a healthy 18 percent growth. Following the liquidity crisis, banks have stepped up buying retail portfolios/assets of NBFCs, in addition to direct lending to them. The trend is reflected in increasing volume of securitisation transactions, which has hit an all-time high to Rs 1.44 lakh crore in 9M FY19, as per ICRA estimates. Given that NBFCs are ceding their market share in favour of banks, retail loans will continue to dominate bank credit -– a trend that is likely to persist.
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