Express news service
NEW DELHI: India is gradually emerging from the rubble of the second wave of the coronavirus pandemic, but one financial indicator continues to disrupt: growth in bank credit.
In June 2021, credit growth for scheduled commercial banks slowed to 5.8% from 6.2% a year ago, largely driven by the sluggishness of lending to industry, which accounts for the highest share of bank loans at 27%.
On a sequential comparison, credit growth plunged 6% in May — a sluggishness that can be attributed to both weak demand due to economic uncertainties and banks’ mistrust of lending due to concerns about the quality of assets after the first wave of Covid-19 – induced disruptions. In absolute terms, gross bank credit growth (food and non-food) stood at Rs. 108.4 lakh crore in June.
On the industrial side, credit growth contracted by 0.3% against growth of 2.2% in June 2020, while in the previous months of April and May it stood respectively at 0.4% and 0.8%.
Within the industry segment, the Government-backed Emergency Credit Line Guarantee Program (ECLGS) to Micro, Small and Medium Enterprises or MSMEs (announced as part of the fiscal stimulus), has helped to the overall growth of credit to industry, without which it would have experienced a larger decline. Credit to medium-sized industries rose 54.6% in June from a 9% contraction a year ago. Likewise, growth in credit to micro and small industries rose 6.4% in June from a contraction of 2.9% a year ago. However, the top-rated companies took advantage of the prevailing low interest rate regime and borrowed in the market to repay part of their high-cost bank credit. Credit to large industries contracted 3.4% in June compared to 3.6% growth a year ago. Out of a total of 36 sectors and sub-sectors, 19 experienced a decrease compared to the period before the second wave of March.
Year over year, more than 10 sectors experienced slowdown in growth. Food processing, steel and iron, cement, fertilizers and electronics, among others, saw significant declines. Out of the total of Rs. 28.67 lakh crore outstanding credit for the industry, the infrastructure amounted to approximately Rs. 10.9 lakh crore. Within infrastructure, the electricity sector comprised more than half at Rs 5.6 lakh crore, followed by roads, telecommunications, etc. But, electricity and telecommunications as well as ports experienced negative growth. Infrastructure strengths were roads and airports, with banks’ exposure to these segments more than doubling from last year. Of course, the resumption of industrial credit growth is crucial for any meaningful and lasting economic recovery.
Data released by the Reserve Bank of India (RBI) showed that credit growth was largely driven by the retail and agriculture segments.
Credit to agriculture and related activities grew at a staggering 11.4% in June 2021 against 2.4% in June 2020. Personal credit, which includes mortgages, auto loans, loans for gold and credit card outstandings, also experienced solid growth of 11.9%. growth in June. Such an acceleration in growth is mainly due to the strong growth in loans for gold jewelry (81.6%) and auto loans (11%). Within personal loans, credit growth to the housing sector fell to 9.7% from 12.6% a year ago. Durable consumer loans fell 19.8% and advances on stocks and bonds plunged and contracted by more than 23%. Education loans also fell by 3.5%.
Credit growth to the service sector also slowed to 2.9% in June, mainly due to decelerating lending to commercial real estate, tourism and hotels, according to the latest data from the RBI.
Rinse with funds
Banks are reluctant to lend even as the banking system has recorded excess liquidity since June 2019.
As of July 2, 2021, the excess liquidity in the banking system stood at approximately Rs. 6 lakh crore (attributed to month-end inflows to wages, salaries and pensions). The surplus can be mainly attributed to the influx of bank deposits consistently exceeding credit growth. In absolute terms, the outstanding bank deposits were Rs. 155 lakh crore as of July 2, 2021 while the outstanding bank credit was Rs. 109 lakh crore. In terms of growth, so far over the year, that is to say the incremental increase compared to March 2021, the growth of bank deposits was 2.2% against the decrease in bank credit ( -0.2%). The additional growth in non-food credit (April to June) for fiscal 22 was -0.4% compared to -0.9% for fiscal 21, indicating that the gradual growth was better than last year but has not yet returned to normal levels, according to care assessments.
“The first quarter of fiscal year is seasonally weak in terms of credit growth, so a clear picture would be known in the second quarter of fiscal 22. Credit growth in fiscal 22 is expected to remain weak in double digits , with growth expected in the second half of fiscal 22, driven by the expansion of the economy and the entry into play of a base effect. Downside risks include limited investment plans, lower discretionary spending than pre-pandemic levels, third wave concerns, partial / full lockdown in key states, which may impact in industrial and service segments, ”noted Madan Sabnavis, Chief Economist, Care Evaluations.
Emkay Global analysts estimate overall credit growth of 9% for FY22 with a reasonable recovery in retail credit during the second half of FY22 and demand for back-end working capital from companies in the absence of ” a third wave of covid-19 and easing of lockdowns.