Credit growth stuck in a low orbit

by Manasi Swamy

The Reserve Bank of India (RBI), on April 7, 2021, announced a slew of measures to improve credit flow. These include Rs.500 billion liquidity support to NABARD, NHB and Exim Bank, enhancement of loan limit for individual farmers to Rs.7.5 million from Rs.5 million against pledge of agricultural produce, a six-month extension of priority sector benefit for bank lending to NBFCs and extension of long-term repo operation (LTRO) scheme by six months.

These measures enable adequate liquidity to banks to disburse fresh loans. But they alone cannot boost credit growth. Demand for credit also needs to pick up.

Liquidity was in abundance in 2020-21, but credit growth fell to 5.5 per cent which was its lowest annual growth level in the past five decades. Usually, year-on-year growth in non-food credit is of the order of 10-14 per cent, at least in the past ten years. Earlier, it was even higher. Evidently, credit offtake had lost steam dramatically even before the 2020-21 lockdown. During 2020-21, growth rates have been understandably anemic. As of February 2021, they were 6.6 per cent higher than a year ago. We do not see a resurgence in credit growth in 2021-22.

Agriculture is the only segment of the Indian economy that fared well post announcement of the nation-wide lockdown in March 2020. Correspondingly, SCB credit growth to agriculture has been accelerating since June 2020 when it was only 2.4 per cent higher than the year ago. By February 2020, the growth rate had touched 10.2 per cent. This growth rate is still much lower than the 12-15 per cent growth in credit offtake during 2013-14 through 2016-17. The recent measures announced by RBI also focus on the agriculture and rural sector. But, the small size of lending to the agricultural sector and its historically lower than average growth implies that it has a limited ability to influence overall lending performance of SCBs.

Agricultural credit accounts for a little over 10 per cent of the outstanding credit portfolio of SCBs. The share of rural and semi-urban areas in SCB credit itself is quite low at around 22 per cent. Metropolitan cities account for over 60 per cent of the credit portfolio of SCBs. This is where state governments have started re-imposing strict curbs. Overall growth in SCB credit may therefore face some resistance in April 2021. We study, below, trends in credit offtake in some major sectors to see the possible trajectory of non-food credit offtake in 2021-22.

Credit offtake from industry was very poor in 2020-21. In each of the months from October 2020 through February 2021, outstanding SCB credit to industry was lower than it was a year ago. This decline is concentrated in larger industrial units. As of February 2021, outstanding credit to large industrial units was 1.5 per cent lower than it was a year ago.

Demand for credit from large industrial units is unlikely to pick-up anytime soon as most of these have kept their capacity expansion plans on the back-burner. Average capacity utilisation of manufacturing units was 66.6 per cent in the December 2020 quarter, according to the RBI’s OBICUS survey. Industries are expected to revive their expansion plans only when capacity utilisation reaches 75 per cent. This does not look possible in the current fiscal given the large gap and the resurgence of Covid-19. Industry accounts for over 30 per cent of SCB lending. The lack of demand from this sector is the primary reason why SCB loans growth would remain tepid in 2021-22.

Housing loans account for a very substantial 14 per cent of all loans of SCBs. They have been a major source of SCB loan growth. Growth in housing loans usually exceeds overall SCB loans growth by a large margin. In 2020-21, growth in housing loans slowed down and its lead over total loans growth also shrunk. As of February 2021, housing loans were 8.5 per cent higher than their level a year ago. This is very low as can be seen by the fact that till August 2020, growth rates were always in double-digits and in February 2020, the growth rate was over 17 per cent. Annual growth rates ranged between 13 and 19 per cent in the past five years. Now, year-on-year growth in housing loans has stabilised at 8-8.5 per cent since September 2020. The resurgence of Covid could make it difficult for this growth rate to climb back to double-digits soon.

Vehicle loans have not slowed down much. They grew by 8.5 per cent y-o-y as of February 2021 as compared to 9.1 per cent in 2019-20. These loans account for a little over 2 per cent of all loans.

Housing loans and personal loans are part of the personal loans category as per the RBI’s classification. Of the others in this category, loans against securities and education loans have been falling. Loans for consumer durables have been rising, but at a much slower pace than earlier. Personal loans have been growing y-o-y at about 9.5 per cent. This is much lower than the 17 per cent growth seen a year ago.

NBFCs have been an important source of demand for bank loans. They use bank loans to fund their lending activities which have a greater reach. NBFCs accounted for 9.8 per cent of SCB loans in 2019-20. However, demand for loans by NBFC is on the decline. After growing at 30-40 per cent during 2018-19 and 2019-20, growth in 2020-21 till February was less than 10 per cent. Bank lending to NBFCs may increase a bit because the sector has been awarded the status of priority lending. But its growth is unlikely to reach the levels seen in the earlier years.

Service providers like transport operators, traders, commercial real estate contribute 1.5 per cent, 6 per cent and 2.5 per cent to outstanding SCB credit, respectively. Over the last one year, credit offtake by transport operators and traders reduced when they were operating at a lower scale. Their credit offtake started rising once again as business returned to near normalcy. The renewed curbs by state governments, therefore, do not bode well for bank credit offtake by these sectors.

Almost all major sources of credit growth have lost momentum and the resurgence of restrictions on mobility makes it difficult for this lost momentum to be recouped. We expect SCB non-food credit to grow by about 6.2 per cent in 2021-22 after growing by 5.5 per cent in 2020-21. Earlier, in 2019-20 it had grown by 6.1 per cent. These are very low growth rates compared to mostly double-digit growth rates till 2018-19.