Interesting stories behind rising bank credit numbers

bank credit rising.

In an emerging economy like ours, bank credit can be considered as an indicator of both expectations and actual economic expansion. It’s also a barometer of the health of the banking sector and the economy at large.

In recent times, a series of economic shocks – demonetisation and the implementation of GST – alongside distress in the commercial banking sector, on account of large non-performing loans in their portfolios, resulted in a sheer drop in bank credit growth.

After posting an expansion of near 11% in September 2016, growth in bank credit dropped to a low in Apr 2017. However, gross bank credit has picked up the pace and has been growing at a robust YoY rate of 10-14%, for over a year. But does the strong revival in banking credit reflect the light at the end of the tunnel for economic growth?

 

bank credit rising

Source: Reserve Bank of India

 

A closer look at bank credit could explain which segments of the economy have been recipients of this increase in funding. There are five major segments of bank credit – Agriculture, Personal (home loan, vehicle loan, education loan, credit card, etc), Industries (Non-Agri& Non-Services), Infrastructure, Priority Sector and Services.

bank_credit_rising

Source: Reserve Bank of India

Personal Loan – An evergreen space

Growth in the personal loans space remains strong with the segment consistently reporting a YoY growth of over 15% over the past couple of years. Its share in gross bank credit has also improved from 22.7% in May 2017 to 26.3% in May 2019.

bank_credit_rising

Source: Reserve Bank of India

This strong and consistent growth in the personal loan segment reflects the strength of the consumption story in India.

Services Lending –Dragged down by trade funding

Services sector lending, which includes lending to traders, NBFCs, commercial real estate, etc., has grown at double-digits for a while now. Its share in gross bank credit has improved from 23.8% in May 2017 to 26.9% in May 2019. However, its growth has consistently been slowing down after touching a peak of 28% in Nov 2018 due to slower credit flows towards trade-related services, which include retail/wholesale trade, export/import, etc.

While global trade tensions present a legitimate concern, it may be too soon to fret over a decline in credit to NBFCs. The NBFC sector has been facing liquidity pressures since the default by Infrastructure Leasing & Financial Services (IL&FS) in September 2018. Still fragile but on the road to recover, it is only a matter of time before NBFCs become credit-worthy once more.

bank_credit_rising

Source: Reserve Bank of India

Infrastructure Lending – Emerged as a dark horse

Infrastructure lending was struggling at less than 5% YoY growth till Jun 2018. Then, in the past 12 months, it suddenly started gaining traction. Despite the slowdown in core sectors of the economy, infrastructure credit picked up well. Though the segment’s share in gross bank credit declined marginally from 12.9% in May 2017 to 12.2% in May 2019 its YoY growth accelerated from 0.0% to over 15.0% in the past 12 months. Happy days ahead for the infrastructure sector?

bank_credit_rising

Source: Reserve Bank of India

While Services, Personal Loans and Infrastructure enjoyed augmented bank credit, Industrial, Priority Sector and Agriculture reported a significant fall in their respective shares in gross bank credit.

Priority Sector Lending –Government’s policies yet to translate into benefits

Despite GOI’s push to affordable housing and credit facilities for SMEs &MSMEs, credit to the priority sector failed to achieve YoY growth of more than 10%. The share of priority sector lending has also been declining from 34.0% in May 2017 to 32.0% in May 2019.

bank_credit_rising

Source: Reserve Bank of India

Agriculture Lending – Growing at 1%+ GDP

Lending to Agriculture & Allied industries reflected a similar picture. YoY credit growth has remained at less than 8.0% for a while now and its share in gross bank credit declined from 14.0% in May 2017 to 13.0% in May 2019.

bank_credit_rising

Source: Reserve Bank of India

Industrial Credit – Subdued performance and no signs of a pick-up

The largest cause for concern is that the performance of Industrial credit was worse than that of the agriculture and priority sectors. Industrial credit growth remained subdued at less than 2.0%, significantly lower than GDP growth. The segment’s share in gross bank credit declined from 25.0% in May 2017 to 20.8% in May 2019.

bank_credit_rising

Source: Reserve Bank of India

All in all, though the expansion in bank credit points to consumption-led growth yet again, the sudden pick-up in credit to the infrastructure segment suggests that growth could be more sustainable as it plays out over a longer period. Lacklustre credit to the industry and agriculture & allied activities, however, remains a serious concern, blurring the visibility of economic growth in the quarters ahead.

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Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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