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 ₹9.44 lakh crore to their outstanding loan books. This reflects new credit flow to the economy. It is more than twice the ₹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 ₹5.1 lakh crore every year to their loan books on an average.
New loans to industry were at ₹97,029 crore in the year ended October 2018, against ₹75,100 crore last year. Services bagged ₹4.74 lakh crore this year against ₹2.17 lakh crore. Retail loans were plentiful too, at ₹2.9 lakh crore in the year ending October 2018 compared to ₹1.15 lakh crore. Lending to MSMEs nearly doubled to ₹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 ₹100 of new bank loans added, it was services which bagged ₹50, while industry received just ₹10. Out of the ₹10 advanced to industry, large firms cornered ₹8.30, while medium and small enterprises had to make do with just ₹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 ₹31 out of every ₹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 ₹21 of every ₹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.
There has been concern about a squeeze on bank credit to MSMEs post-demonetisation. Overall loans to MSMEs doubled this year, with ₹11.6 out of every ₹100 in new bank credit flowing to them. But the MSMEs in services hogged ₹11 of this, leaving manufacturing MSMEs with just ₹0.60. The surge in services MSME loans likely reflects small-ticket loans to entrepreneurs under the Pradhan Mantri Mudra Yojana, which has seen a big push by the government. In FY18, banks are believed to have lent over ₹92,490 crore and NBFCs ₹27,000 crore under the Mudra Yojana.
Within the priority sector, though services MSMEs, agriculture and housing saw brisk growth, exporters were starved of credit, with their credit flow in negative territory for the last three years.
Agriculture, bagging ₹8 of every ₹100 in bank loans has also seen a dip in credit flow compared to the pre-demonetisation period. Thus data clearly show that if mid- and small-sized manufacturing firms, exporters or farmers complain of tight credit, they have good reason to do so.
In fact, the above shifts in bank credit flows have been evolving for some time.
Between October 2013 and October 2018, total bank credit growth has expanded at 9% a year. But retail loans have galloped at 17% a year in the same period. Loans to services have grown at 12% and those to agriculture at 11%. Industry has given up its share of the pie, with bank credit to it growing at just 3% a year. Banks’ strong appetite for retail loans and their parsimony with industrial loans could be the result of the risk aversion brought on by their terrible lending experience with corporate loans during the previous economic boom.
But at this juncture, it is important for the Centre and the RBI to allow banks to make their own decisions on allocating credit, instead of driving it to specific segments. For banks to regain their appetite to lend to riskier borrowers, they must first digest the mountain of bad loans that today account for over 11% of their loan books.
