Falling Bank Credit Growth Adds To Slowdown Worries
Customers exit a State Bank of India Bank branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Falling Bank Credit Growth Adds To Slowdown Worries

Bank credit growth continues to remain muted despite attempts to kick-start lending by ensuring surplus liquidity and infusing more capital into public sector banks.

Fortnightly data released by the Reserve Bank of India showed that gross bank credit growth fell to 10.26 percent for the fortnight ended Sept. 13. Credit growth in the first fortnight of the month remained at the same level as in August and well below the peak of 15.1 percent in December 2018.

At current levels, credit growth is at its lowest since about March 2018.

Credit growth has fallen even though banking system liquidity is in surplus and lending restrictions placed on some banks last year have now been lifted.

It comes down to risk-aversion, said Sajjid Chinoy, chief India economist at JP Morgan in a recent interview. When you are in the midst of an economic slowdown, all economic agents —whether it is households, firms, financial intermediaries—tend to become more risk-averse.

“Banks have just come out of a bruising non-performing asset cycle and to the extent that growth has slowed and credit-risk perceptions have increased in the economy, banks at this point do not want to take undue credit risk,” he explained.

The slowdown in bank credit growth is mirrored in a fall in the rate of growth of money supply in the economy.

RBI data shows that M3 growth, which is the broadest measure of money supply, has also moderated since July 2019. Growth in M3 fell to 9.9 percent on an annual basis in August 2019, according to data from the RBI. That is the lowest since September 2018 when it stood at 9.4 percent.

M3 is largely decided by the money multiplier effect, said Rajni Thakur, economist at RBL Bank. Falling growth in M3 is an indicator of continuing risk-aversion and lower economic activity, she explained.

What’s Behind The Credit Fall?

The decline in credit growth has come on the back of weakness in sanctions to medium-sized and small businesses.

Bank credit growth to micro and small enterprises has stagnated at under 1 percent since December 2018, according to RBI data. Similarly bank credit growth to medium enterprises fell to 1.67 percent in July 2019.

Credit growth to large enterprises is growing at a faster clip of over 7 percent, RBI’s monthly data for sectoral credit shows. Data for August is yet to be released.

The slowdown in bank credit growth is partly due to a continued slowdown in lending to the auto industry since Jan. 19 and a conscious slowdown in unsecured lending, which have been the major growth driver in the past two-three years, amid fears of a consumption slowdown, said Suresh Ganapathy of Macquarie Research in a report dated Sept. 25.

“Our channel checks reveal that there has been a lot of risk-aversion in the sector and banks have become very cautious towards lending, especially to the SME space,” Ganapathy wrote.

Retail Loans Still Strong

Despite some moderation, the pace of growth of retail loans remains robust.

Personal loan credit growth stood at 17.03 percent, on a year-on-year basis, at the end of July 2019, according to RBI data. Growth of credit towards housing loans stood at 19.23 percent at the end of July 2019, the highest in the past two years, while the credit card outstanding grew at 26.5 percent.

With falling automobile sales the demand for car or bike loans has reduced. The vehicle loans portfolio for banks grew at under 5 percent in July 2019 compared to 12 percent at the end of July 2018.

There is an interplay between economic growth, credit growth and a banks’ spreads and credit costs. If the economy is growing at a nominal rate of over 8 percent (real growth of 5 percent and inflation combined at 3.1 percent), expecting credit growth to remain above 12 percent would not be rationale
Rakesh Kumar, senior vice-president, Elara Capital.

A Bank of America-Merrill Lynch Global Research note, dated Sept. 20, said that the recent weakness in loan growth may continue for the next two-three months but should bottom and improve after that.

According to BofA-ML’s India Loan Growth Indicator, commercial bank loan growth is likely to fall below 10 percent around between October and November 2019. The expected reduction in interest rates, however, is likely to improve loan growth over time, the brokerage house said.

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