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Indian banks would see their loan growth plummet in FY21 as the year was a year of recession. While the magnitude of the production loss and credit deceleration has been much less than previously feared, the recovery has been uneven. This means that the lenders have been selective in the granting of loans.
So who has the most credit gone to since foreclosure restrictions were gradually eased from the end of June?
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Despite the tensions and the abstention from the moratorium, the banks lent ??64 on each ??100 of credit to individuals, most of which was devoted to mortgage loans. In other words, the share of retail in the incremental credit between July 2020 and January 2021 is 64%. The share of home loans within businesses was 34%, followed by unsecured personal loans at 18.5%. What this shows is that the banks were not only comfortable lending to retail customers, but were even willing to continue with unsecured loans.
While pockets of tension exist and the bad debt ratio of individuals has risen slightly, a large-scale restructuring of personal loans has not materialized for most banks. Additionally, major lenders such as the State Bank of India (SBI) and HDFC Bank Ltd have reported that most retail borrowers have started repaying on schedule after the initial problems during the foreclosure months.
The service sector has been the most affected by the pandemic. In fact, the rapid recovery reflected in various high-frequency data has been largely in manufacturing and agriculture, while services are still sluggish. Ergo, bank credit to services decelerated sharply but 29% of incremental credit went to this segment. However, the loans were largely made to wholesale and retail trade and to non-bank financial corporations. Those to other services such as transport, tourism, maritime transport, hotels and professional services have hardly increased.
The sector most affected in terms of credit has been the manufacturing sector. Loans to large companies declined 40% between July 2020 and January 2021. Government credit guarantee programs and targeted liquidity operations by the Reserve Bank of India have bolstered lending to small businesses. Of the total additional loans granted, 15% went to micro, small and medium enterprises.
Much of Exercise 21 was about reducing the impact of the pandemic on production. Bank credit has been an instrument for sustaining the business rather than for growth. Analysts expect bank credit growth to improve to at least 9% in FY22. It would be interesting to see if banks continue to focus on retail and services during the growth phase.
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