Bank loan growth – The devil is in the details

Shishir Asthana Moneycontrol Research

One key parameter that is closely watched by economists and analysts to signal growth in the economy is the growth of non-food credit. The needle refused to move even as the government tried nudging banks to increase lending.

The fact that the effect of demonetisation and poor implementation of Goods and Service Tax (GST) is diminishing is visible in the non-food credit growth. Data released by Reserve Bank of India (RBI) shows loan growth of banks has hit a three-year high in November. Credit offtake had touched multi-decade lows in the past year as banks focused their energy on recovery and ‘managed’ their non-performing assets (NPAs). Credit growth was below 5 percent in February 2017.

Another important feature is that the credit growth rate has outpaced that of deposit growth. While deposit growth as of fortnight ended November 10 was 8.1 percent, credit grew at 8.6 percent.

Since October, the trend in growth in loans to large corporates has turned positive after a contraction for more than a year. Bank loans, including procurement credit and loans to individuals, farmers and businesses, rose 9.64 percent year-on-year (YoY) as compared to 6.6 percent growth in the same period in 2016 and 9.3 percent in 2015.

Non-food bank credit witnessed double-digit growth for the first time in 15 months, rising 10 percent YoY, during the fortnight ended November 24.

In his credit policy statement, RBI Governor Urjit Patel had said that "There has been some pick-up in credit growth in recent months... Recapitalisation of public sector banks may help improve credit flows further."

While overall the numbers look bullish, the devil is in the details. Sectoral data released by the central bank with a lag of two months shows that as of September 29, credit to ‘industry’ fell by 0.4 percent on a YoY basis. The first six-month data shows that credit to industry shrank by 1.5 percent. Retail credit again helped save the day with a growth of 17.33 percent. Mortgage and unsecured loans also posted strong growth.

Post the recent policy announcement, various reports have quoted bankers saying the credit offtake has started picking up. Banks’ credit growth is nowhere close to their prime and still are not running on all engines. A boost to credit growth can only be possible if corporate lending picks up, but that is easier said than done.

The banking sector has lost market share to non-banking finance companies (NBFC) and the fast-growing bond market. Better rated companies prefer to use the bond market as the process is transparent, easier and faster as compared to availing a bank loan. NBFCs are preferred as they are faster and easier despite the fact that their loans are costlier than those of banks.

While bank credit has shown signs of improvement, they have a long way to go to reach their prime. Though capitalization would make the banks bolder they will have a tough time convincing and bring back disgruntled customers who had to take high-cost loans from NBFC at their time of need.

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