Why is bank credit growth plummeting?
But these measures are unlikely to help in a big way to revive bank loan demand, the problem is the demand slump and lack of economic activities on the ground, not the high cost of money
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One of the key indicators of economic activity is the flow of bank credit to productive sectors. Movement of money is like lubrication in a machine and its absence tells us a lot about the state of economy. Let us look at what’s happening on this front.
According to latest data from the Reserve Bank of India (RBI), bank credit growth slowed to 8.5 percent in January from 13.5 percent in the year ago period with loans to industries slowing at the fastest pace among the major segments.
Credit growth to industry and services sector decelerated to 2.5 percent and 8.9 percent in January from 5.2 percent and 23.9 percent in the year ago period, respectively. Among industries, loans to smaller companies are slowing at the worst pace. Bank lending to micro and small companies grew at just 0.5 percent as compared with a contraction of 0.7 percent in the year-ago period. When it comes to medium-sized companies and large companies, loan growth stood at 2.8 percent compared with 6-7 percent in the corresponding period last year.
Retail loans do better: The segments that retained their pace of growth more or less at the same rate is personal loans, which grew 16.9 percent in January. Housing loans grew 17.5 percent, a tad less than 18.4 percent in the year ago period. Vehicle loans grew at 9.8 percent as compared with 8.6 percent in the year-ago period.
One interesting aspect of the retail loan segment is the trend in consumer durable loans. These are loans to buy household appliances and cars. This segment reversed a major negative growth seen in the year-ago period, growing at 41.3 percent compared with a contraction of 75.2 percent YoY. This shows there is some improvement in consumer sentiment compared with the year-ago period.
Economy still in a mess Bank credit growth is falling not because of the higher cost of funds but lack of genuine demand on the ground. In the current rate cycle, the Monetary Policy Committee (MPC) has cut the repo rate at which it lends short-term funds to banks by 135 bps while banks have passed on around 70 bps to end-borrowers.
But the worsening economic slowdown has hit consumer confidence prompting customers to postpone purchases. The recent consumer confidence surveys confirm this trend.
The significant slowdown in private investments too have impacted economic activities on the ground. According to CMIE data, new private sector project investments declined 5 percent in the September quarter compared to the preceding quarter and 70 percent compared to the year-ago period. As against this, public sector projects rose 36 percent QoQ and declined by 46 percent YoY, CMIE data showed.
Now, if one looks at the latest GDP figure (December quarter), again the slowdown in private consumption is clear. In Q3, non-government GDP actually grew by just 3.9 percent. Private consumption has been on a decline.
Gross Fixed capital formation (GFCF), which indicates the investment activity in the economy, contracted 5.2 percent in Q3 as against a contraction of 4.1 percent in Q2. Overall, the loss of economic momentum has continued in the Q3.
What is the takeaway? RBI has been nudging banks to lower lending rates and improve monetary transmission through various means, including unconventional ones. In the last policy review, even when MPC held the key rate, the RBI use tools to enable banks to lend more including relaxation in the mandatory reserve requirement in lending to certain key segments.
But these measures are unlikely to help in a big way to revive bank loan demand, the problem is the demand slump and lack of economic activities on the ground, not the high cost of money. The government will have to work on stimulating the economic activities on the ground (both at the consumer level and industry level) by putting more money in the hands of people and bringing in business-friendly reforms. Land and labour reforms are key.
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