NEW DELHI: India is gradually emerging from the wreckage of the second wave of coronavirus pandemic, but one financial metric is still causing discomfort: bank credit growth.
In June 2021, the credit growth of scheduled commercial banks slowed to 5.8% as against 6.2% a year ago largely driven by bleak lending to the industry, which accounts for the highest share in bank lending at 27%.
On a sequential comparison, credit growth plunged from 6% as of May --- a sluggishness that can be ascribed to both low demand due to economic uncertainties and wariness of banks to lend on concerns of asset quality following the first wave of Covid-19-induced disruptions. In absolute terms, the gross bank credit (food and non-food) growth stood at Rs. 108.4 lakh crore in June.
As for industries, credit growth contracted by 0.3% as against 2.2% growth in June 2020, while in the preceding months of April and May it stood at 0.4% and 0.8%, respectively.
Within the industry segment, the government-backed Emergency Credit Line Guarantee Scheme (ECLGS) to micro, small and medium enterprises or MSMEs (announced as part of fiscal stimulus), aided overall credit growth to the industry, without which it would have seen a wider degrowth. Credit to medium industries grew 54.6% in June as compared to a contraction of 9% a year ago. Similarly, credit growth to micro and small industries rose 6.4% in June as against a contraction of 2.9% a year ago. However, the high-rated firms took advantage of the prevailing low-interest rate regime and borrowed from the market to pay off some of their high cost bank credit. Credit to large industries contracted by 3.4% in June as compared to a growth of 3.6% a year ago. Of the total 36 sectors and sub-sectors, 19 saw a de-growth compared to the pre-second wave period of March.
On a year-on-year basis, more than 10 sectors have seen a dip in growth. Food processing, steel and iron, cement, fertiliser and electronics among others have witnessed significant declines. Of the total Rs. 28.67 lakh crore credit outstanding to industry, infrastructure accounted for about Rs 10.9 lakh crore. Within infrastructure, the power sector comprised over half at Rs 5.6 lakh crore followed by roads, telecom, etc. But, both power and telecom as well as ports were witnessing a negative growth. The brightest spots within infrastructure were roads and airports as banks' exposure to these segments more than doubled over last year. To be sure, pick up in industrial credit growth is crucial for any meaningful and sustainable economic recovery.
Data released by the Reserve Bank of India (RBI) showed that the credit growth was largely driven by retail and agriculture segments.
Credit to agriculture and allied activities saw a staggering growth of 11.4% in June 2021 as compared to 2.4% in June 2020. Personal loan, which includes mortgage loans, vehicle loans, loan against gold and credit cards outstanding, also saw a robust 11.9% growth in June. Such an accelerated growth was primarily due to high growth in loans against gold jewellery (81.6%) and vehicle loans (11%). Within personal loans, credit growth to the housing sector fell to 9.7% from 12.6% a year ago. Consumer durable loans fell by 19.8% and advances against shares and bonds nosedived and shrank by more than 23%. Education loans, too, saw a de-growth of 3.5%.
Credit growth to the services sector also decelerated to 2.9% in June mainly due to deceleration in lending to commercial real estate, tourism and hotels, showed the latest RBI data.
Flush with funds
Banks are reluctant to lend even as the banking system has been sustaining a liquidity surplus since June 2019.
As of July 2, 2021, the liquidity surplus in the banking system stood at around Rs. 6 lakh crore (attributed to month end inflows towards salaries, wages, and pensions). The surplus can be primarily attributed to inflow of bank deposits consistently outpacing 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 in the financial year i.e., the incremental increase over Mar 2021, the growth in bank deposits has been 2.2% as against the degrowth in bank credit (of -0.2%). The incremental non-food credit (April to June) growth for FY22 stood at -0.4% as compared with -0.9% in FY21, which indicates that the incremental growth has been better than last year but is yet to return to normal level, according to Care Ratings.
“The Q1 of the financial year is seasonally weak in terms of credit growth, hence a clear picture would be known in Q2FY22. FY22 credit growth is likely to remain in low double-digit with growth expected in the second half of FY22 led by expansion in the economy and base effect coming into play. Downside risks include limited capex plans, lower discretionary spending compared to pre-pandemic levels, concerns over third wave, partial/complete lockdown in key states, which may impact the industrial as well as service segments," noted Madan Sabnavis, chief economist, Care Ratings.
Analysts at Emkay Global estimate overall credit growth of 9% for FY22 with a reasonable pick-up in retail credit in the second half of FY22 and back-end working capital demand from corporates in the absence of a third wave of covid-19 and easing of lockdowns.