Bank credit: is it growing, and where’s it going?

Credit flow to industry, or the lack of it, has been a bone of contention between the Centre and the Reserve Bank of India (RBI). While RBI and its supporters assert that bank lending is now growing at a brisk pace, the government and industry lobbies insist that the credit taps remain shut. So who’s right? An analysis of RBI data on the deployment of bank credit yields some answers. Credit flow accelerates RBI data shows that Indian banks’ non-food credit growth, which had slumped to 7-8% in the three years to October 2017, got back to double-digit growth in the last one year (October 2017 to October 2018) at 13%. Historically, bank credit in India has either matched or grown ahead of nominal GDP. In the three years from FY15 to FY18, bank credit growth at 7-9% lagged nominal GDP growth of 10-11%. But as the nominal growth rate picked up to 12.8% in the first half of this fiscal, bank credit has matched this expansion. Absolute numbers on net credit flow make it even clearer that banks have stepped up their lending. In the year from October 2017 to October 2018, banks added a net Rs. 9.44 lakh crore to their outstanding loan books. This reflects new credit flow to the economy. It is more than twice the Rs. 4.7 lakh crore addition in October 2016-17. In fact, in absolute terms, net bank credit flow in the past year has been at its highest level in a decade. In the nine years from 2007-08 to 2016-17, banks added Rs. 5.1 lakh crore every year to their loan books on an average. New loans to industry were at Rs. 97,029 crore in the year ended Ocetober 2018, against Rs. 75,100 crore last year. Services bagged Rs. 4.74 lakh crore this year against Rs. 2.17 lakh crore. Retail loans were plentiful too, at Rs. 2.9 lakh crore in the year ending October 2018 compared to Rs. 1.15 lakh crore. Lending to MSMEs nearly doubled to Rs. 1.1 lakh crore. These numbers suggest that RBI is right to take the view there’s no systemic problem impeding bank credit, despite its sweeping a few public sector banks into the Prompt Corrective Action framework. Services pips industry But if credit flow has been picking up, why do market participants and the government complain that banks are playing scrooge? The key reason appears to be that a few sectors are hogging the lion’s share of these loans. For instance, for every Rs. 100 of new bank loans added, it was services which bagged Rs. 50, while industry received just Rs. 10. Out of the Rs. 10 advanced to industry, large firms cornered Rs. 8.30, while medium and small enterprises had to make do with just Rs. 1.70. Apart from lending directly to large firms, banks were also heavy subscribers to corporate bonds, which are mostly floated by large companies. As much as Rs. 31 out of every Rs. 100 of new bank loans did not go to businesses at all, but to retail folk borrowing towards their home, credit card or personal loans. Though credit flow to services appeared plentiful, NBFCs (financial services) cornered a disproportionate share of loans to this sector. With as much as Rs. 21 of every Rs. 50 in new bank loans to services finding its way into NBFCs, direct borrowers in services were left with smaller slices of the loan pie. NBFCs in turn seem to have funnelled this money into consumer loans, real estate, affordable housing, loans against property and shares, promoter funding and infrastructure.

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