The Fine Print of Bank Credit Recovery

1. States Show

In 2021-2022, outstanding credit across India grew by 10.7%. But as it has been inflated by the base effect, we have to look over a longer period to assess the growth. Lending sanctions increased by an average of 7.3% per year (compound annual growth rate) over the three years ending March 2022, a slower pace than the double-digit growth of the previous two years. However, the good news is that most of the high-impact states grew faster than the national average, according to RBI data.

The high impact states are the 12 largest state economies, whose combined growth can significantly boost India’s growth. They accounted for 49% of ₹119 trillion in outstanding credit as of March 2022. Eight of them had better credit growth over the three-year period than India. Maharashtra, India’s wealthiest state, and Gujarat were major exceptions to this trend. All regions, with the exception of the west and north, posted above-average growth.

2. Rural vs. urban

Credit growth in the rural sector had slowed significantly in 2016-17 and 2017-18, possibly crippled by demonetization. But in each of the past four fiscal years, rural credit has outpaced the all-India figure, averaging 12.1 percent a year. As a result, its tiny share in overall credit is gradually increasing and that of the metropolitan segment is shrinking.

However, the rural growth rate slowed again to 11.1% in 2021-22, even as other segments showed strong base effects. The metropolitan segment grew by 9.2% after meager growth of 1.4% in 2020-21. The urban segment, which includes the semi-urban segment, grew the fastest at 13.7%.

“The loss of jobs and income in the unorganized sector has been unprecedented,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. “This explains the slow credit growth in the rural economy. However, there are now green shoots of recovery in the rural economy.”

3. Cautious companies

Credit is used by both businesses and households, and the latter are doing better as the business climate remains cautious. Demand for business credit saw some recovery last year, rising 5% after two successive contractions. But growth in loans to households, which claim a larger share than businesses, improved further, from 10.9% to 13.3%.

The trend for both categories has increased in each successive quarter of 2021-22.

“The industry has deleveraged over the past two to three years, and demand has been slow as well,” Vijayakumar said, explaining why India Inc. might be lagging behind. As demand slowly recovers, a challenging geopolitical landscape, rising interest rates and the depreciation of the rupee could put a damper on the revival of investment spending. ₹100 crore) fell slightly between June 2021 and March 2022, and that of lower cost loans (up to ₹25 lakh) fell from 32.9% to 33.1%.

4. PSB Trail

Private sector banks are increasingly fighting for a bigger share of credit. Public sector banks recorded a quarterly recovery in lending of 4.9%, while private banks led with growth of 6.5%. As private banks have consistently overtaken public banks, their share of overall credit has steadily increased from less than 30% five years ago to 38% today.

The nascent recovery is expected to continue. High-frequency data from the RBI showed bank lending as of June 17 was up 13.2% year-on-year, albeit from a weak base. Rising bond yields could also help push borrowing into the banking system.

“This recovery is sustainable because it’s more or less tied to the general level of economic activity,” said Joseph Thomas, head of research at Emkay Wealth Management. He thinks fears of a global recession may be a little overblown at the moment. , although the possibility of a slowdown in credit growth cannot be ruled out.

5. Industry Breakdown

Agricultural and personal loans held up well, but loans granted to industry were slow to recover. Credit outstanding in the agriculture segment increased 5.7% sequentially in the March quarter, while growth in the personal lending space was 6%. Both have picked up the pace over the past year.

“Bank credit growth was driven by a number of factors, but the contribution from retail lending is quite significant,” Thomas said.

Loans to industry experienced some moderation, falling from 4.2% in the December quarter to 3.4% in the March quarter. Vijayakumar said sectors such as telecommunications, pharmaceuticals, energy and export-oriented segments are doing well, but micro, medium and small businesses in the sector have been negatively affected.

As demand picks up and grows impressively in some segments, an interest rate hike will be absorbed to some extent, experts said. However, in the event of uninterrupted inflation and monetary tightening, credit demand could again suffer.

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