The economy is slowing, but lending by banks, usually an indicator of economic activity, seems to be picking up. Data put out by the RBI show that total (non-food) bank credit expanded 17 per cent year-on-year in August, accelerating from 13-14 per cent in the preceding months this year.
Breaking down this data into individual segments throws up quite a few surprises. The commercial real estate sector, believed to be in doldrums, saw credit growth of 17.4 per cent in August while home loans surged 19 per cent. The services sector saw credit expansion of 18.4 per cent. Vehicle loans grew 23 per cent.
What explains this?
First, if the corporate sector is wary of new investments, why is it using up so much more credit? According to bankers, companies are borrowing more, not to fund new projects but to finance working capital requirements. After RBI’s short-term rate hikes in July, companies have taken to borrowing more from banks rather than the bond market. “Adverse money market conditions after the liquidity tightening measures have prompted companies to extend their line of credit with banks,” says Sunil Pant, Chief General Manager, SBI.
Within the services segment, non-banking finance companies (NBFCs) rely a lot on bank credit. Loans to NBFCs shot up 18 per cent in August from 5 per cent in the previous months. Oil marketing companies have also been knocking at the banks’ doors.
“Oil marketing companies have borrowed in rupees from banks, to swap them for dollars at RBI’s special swap window. This has also led to a spike in credit growth for the entire system,” explains Abheek Barua, Chief Economist, HDFC Bank.
All this explains why companies have been taking more loans, but what about individuals? Home loan companies say the 19 per cent growth in housing loans is due to first-time buyers, who don’t time their purchases to interest rate or economic cycles.
“The home loan segment is driven by first-time home buyers. Tier-II and Tier-III cities are seeing higher growth,” says Pant.
Retail loans grow
Though the Index of Industrial Production shows shrinking consumer durable sales, credit to this segment grew 34 per cent in July and August. Players say the sudden spurt in loans shows that buyers are reducing cash purchases and depending more on credit.
Vehicle loans expanded 23 per cent in August, while automakers have seen only a 4 per cent growth in sales. Here, too, players explain that buyers are now using more credit than cash to purchase vehicles. Others say that banks have grabbed a chunk of this market.
“Vehicle purchases are made either fully on cash basis or financed by credit from the manufacturer or NBFCs or banks. With interest rates on the rise, banks have been able to offer better rates than NBFCs. Banks have also been able disburse loans quickly. Hence, there has been a shift in favour of banks which has led to higher growth,” says SBI’s Pant.
But others believe that this cannot be the sole reason. “The shift from NBFCs to banks has been happening for quite a while now, and it does not explain such a sharp increase in loans. We feel there is an anomaly in the numbers and there may be some downward revision,” says HDFC Bank’s Barua.
Overall, bankers warn that it may be best to not read too much into the August numbers but wait for sustained trends.