Why is RBI worried about credit growth?

The RBI Governor’s policy to maintain an accommodative stance and to ensure sufficient liquidity to industry needs to be viewed against the backdrop of muted credit growth in the second quarter of FY21 despite a slew of measures taken by the government and the RBI since March.

Growth in deposits has, however, been steady. Analysts expect credit growth to remain low in the coming months.

The country’s largest private sector lender, HDFC Bank, in its provisional figures for Q2 FY21, said it has registered a 16 per cent increase in advances, along with a 20 per cent growth in deposits compared to a year ago.

Others, such as IndusInd Bank, registered a 10 per cent increase in deposits and a 2 per cent rise in net advances in the same period.

YES Bank, too, said its deposits increased 15.7 per cent to ₹1,35,815 crore from ₹1,17,360 crore as on June 30, 2020, while loans and advances grew just 1.4 per cent, to ₹166,854 crore, at the end of Q2 FY21.

Consumption recovery

Surprisingly, despite expectations of a recovery in consumption, Bajaj Finance also revealed that it added just 36 lakh new loans in the second quarter this fiscal, just about half of the 65 lakh new loans a year ago.

State Bank of India Chairman Dinesh Kumar Khara said the lender has a credit growth of 6-7 per cent so far, with growth more or less reaching 70-80 per cent of pre-Covid-19 levels in certain sub-segments.

For the fortnight ended September 11, 2020, bank credit grew 5.26 per cent on an annual basis to ₹102.24-lakh crore while deposits rose 11.98 per cent to ₹142.48-lakh crore, according to RBI data.

In the fortnight ended September 13, 2019, bank credit was at ₹97.13-lakh crore and deposits at ₹127.22-lakh crore.

Sectoral deployment

More worryingly, RBI data on sectoral deployment of credit revealed that non-food bank credit growth decelerated to 6 per cent this August from 9.8 per cent in August 2019, largely due to a slowdown in credit appetite across segments, including agriculture, industry, services and personal loans.

“Personal loans continued to perform well, registering a growth of 10.6 per cent in August 2020, as compared with 15.6 per cent growth in August 2019,” the RBI said, adding that within this sector, vehicle loans registered a sharp rise.

An SBI Ecowrap report noted that per RBI data, in August, except services and personal loans, credit to all other major sectors declined.

“The bad thing is that overall bank credit has increased in June and July by ₹39,200 crore but in August it declined by ₹36,000 crore, which is mainly due to a decline in personal loans and credit to infrastructure segments. One good thing is that the credit offtake to NBFCs has turned positive after three months of contraction,” it said.

Where credit rose

Within industries, credit to leather and leather products, petrochemicals, glass and glassware, basic metal and metal products, vehicles and parts, construction and roads, and paper and paper products grew sharply.

But credit growth to all other industries declined incrementally.

Bankers said that with the loan moratorium and economic uncertainty, there has been some amount of caution in lending.

“When a customer does not have repayment capacity and has taken the loan moratorium, neither would he have the credit appetite and it would have to be seen how far a fresh loan can be extended,” noted a bank executive.

Banks are, however, expecting a boost in retail consumption in the upcoming festival season and many have announced a variety of offers.

A CARE Ratings report noted that data for the last five years indicate that generally incremental outstanding credit is weak in the first half and gradually turns to positive in the second half of the fiscal.

“Credit growth remains slow despite the availability of liquidity in the banking system along with rate cuts by scheduled commercial banks, leading to lower interest rates for fresh loans (reduction in interest rates of 127 basis points as compared with August 2019),” it said, adding that overall bank credit growth is expected to remain slower in the near term.