The silver lining in India's credit growth story



Credit growth is at abysmal rates in India today. At the end of January, credit growth slowed down to a low of 5.1% yoy, more than halving from the growth during the corresponding period of the previous year. From the looks of it, the number suggests an overall drag on loans offtake by economic agents. This is not far from the truth: There has been a secular decline in credit growth across various categories – agriculture, industry, services and personal loans. 

Credit ex-industry relatively strong

What is however, far from the truth is the extent of decline. Overall credit numbers are disproportionately dragged down on account of a shrinkage in credit offtake by 5.1% in the industrial sector, even as it retains 8% growth rates for agriculture and services. Personal loans, in fact, is still witnessing double digit growth.
If we exclude the impact of industry on credit, the scenario looks far more robust. Credit ex-industry has been growing faster than total credit since mid-FY14, and the gap between the two has only increased overtime. The gap increased to 6.7 percentage points in April 2016, and then in November 2016 and is currently at a very close 6.4 percentage points. Therefore, it is unsurprising when the credit ex-industry number turns up at a double digit 11.5%, more than double the growth in total credit. 

Gap between growth in credit and credit ex-industry is strengthening

This, in no way means that the steady decline in credit ex-industry is not something to worry about – especially in the face of still persistent NPAs, particularly in the public sector banks – only that, there needs to be a sectoral targeting to resolving the credit problem. In this case, the problem area is industry. Numbers of industrial production don’t give much room for hope in the near future either. Industry has been almost flat over the April-January FY17 period. In fact, even if we were to anticipate a pickup in industry demand in the near future, it is unlikely that loan offtake will improve in a hurry. Capacity utilisation among manufacturing companies is around the 70% mark, and unless the companies are assured of continued increase in demand levels, we are unlikely to see this piece of credit growth resolve itself organically.  
In the next post we will drill down to the various segments of industry that are plagued with poor credit offtake.

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