Customers enter a bank branch of the Housing Finance Development Corp. (HDFC) in Mumbai. (Photographer: Santosh Verma/Bloomberg News)

Bank Credit Growth At A Five-Year High In FY19

The Indian economy has thrown up a number of conflicting indicators in the past few months. Manufacturing output has moderated and consumption demand has shown signs of weakness. Exports have shown a modest pick-up while imports have fallen.

One indicator that has held strong through the financial year 2018-19 is bank credit growth. The flow of credit is an important determinant of economic activity and strength in bank credit may suggest that concerns about a slowdown in the economy may be overdone. To be sure, many argue that non-bank lenders who have faced tough market conditions have moved to bank lending and pushed up credit growth.

Full financial year data released by the RBI on Wednesday provides some insight into credit trends.

Five-Year High

Gross bank credit grew by 12.2 percent in the financial year ended March 2019, the sectoral credit data showed. Incremental credit rose by Rs. 9.4 lakh crore in FY19 compared to Rs. 5.8 lakh crore in FY18.

The credit growth reported in FY19 was the highest since FY14 when bank credit grew at 14 percent. Thereafter, bank lending slowed as the Reserve Bank of India started a clean-up of bank balancesheets and corporate borrowers shifting focus to deleveraging.

Soumyakanti Ghosh, chief economic advisor at State Bank of India, said that credit growth was driven by lending to non-banking financial companies (NBFCs), continued buoyancy in retail advances because of housing loans and credit to large industries. Credit growth was also driven by the government’s push to roads and the power sector, he said.

Bank Credit Excluding NBFCs

While a number of experts cite credit to NBFCs as a reason for the strong growth in bank lending. data suggests otherwise.

Bank credit to NBFCs grew at 29.2 percent in FY19 compared to 26.9 percent in the previous year.

Bank credit-excluding loans to NBFCs also grew at a strong pace of 11.06 percent in the financial year ended March 2019. This, too, was the highest since FY14, showed a comparison of the data over the years.

Credit To Large Companies Rises

Credit to industry grew by 6.9 percent for the financial year ended March 2019.

The benefits of this pick-up in industrial credit was limited to large enterprises which saw a 8.2 percent increase in bank lending. Credit extended to micro and small industries grew by a mere 0.7 percent, while credit to medium industries rose by 2.6 percent.

The first bi-monthly monetary policy statement of FY20 had highlighted that credit flow to micro and small as well as medium industries has remained tepid despite a broader pick-up in fund flows.

Within industry, credit to infrastructure rose 18.5 percent compared to a decline of 1.7 percent in the previous year. Credit to the telecom sector rose 36.7 percent, while credit to ‘other infrastructure’ rose 53 percent. Loans to the loan sector rose 12.2 percent and power sector loans rose 9.5 percent.

Retail Credit Slows Marginally

Retail credit, which has seen strong growth over the last few years, saw some moderation in growth in FY19.

Total retail loans grew by 16.4 percent in the year-ended March 2019 as compared with an increase of 17.8 percent in the previous year. Credit card outstanding amounts rose 28.6 percent during the year compared to 31 percent in the previous year. The ‘other personal loan’ segment, which includes unsecured loans, rose at a more modest clip of 19.4 percent in FY19 compared to 35.3 percent a year ago.

Housing loans saw a pick-up in growth to 19 percent compared to 13.3 percent last year.