Bank Credit Is Expanding, But Where Is Money Going?

Based on the information provided by the central bank, there has been a rise in bank loans in certain sectors that are witnessing a rebound and relief from a more favourable scenario in terms of asset quality. In total, there has been a roughly 15% uptick in bank lending over the 12-month period ending in March 2023, compared to a modest 10% increase in the preceding year.

Have you ever wondered where the majority of bank funds are allocated? As per the analysis of RBI‘s sectoral credit growth statistics, banks have been actively boosting their lending portfolio to individual borrowers. Specifically, there has been a rapid surge in bank loans granted to consumers within the personal loan category. In the period of 12 months leading up to March 2023, there has been a remarkable 35% increase in the size of this particular category.

Additionally, the growth of loans has shown a significant upswing of 60% compared to the corresponding timeframe from the previous year. Officials state that retail loans are the primary catalyst for overall credit growth, followed by the services industry. In February, personal loan growth was uplifted by housing loans, auto loans, and other small-ticket loans, resulting in a growth rate of 20.4%

The demand for credit among consumers has seen a significant increase, particularly in loans for credit cards and consumer durables. The latest figures indicate a remarkable surge in credit card debt, which rose by 31% in the 12 months leading up to March, compared to just 13% in the previous year. Similarly, there has been a significant expansion in the student loan portfolio, growing by 17.1% as opposed to the previous year’s 6%.

This growth in credit is largely due to the substantial role played by Non-banking finance firms (NBFCs) in extending credit to the services industry. Furthermore, all demographic groupings, including rural, semi-urban, urban, and metropolitan areas, have experienced an increase in bank credit with double-digit growth. As a result, there is an increased demand for working capital loans. Overall, these trends suggest a strong consumer appetite for credit and a growing economy, although it is essential to carefully manage credit in order to avoid over-indebtedness.

Banks are often inclined towards lending to individual consumers due to the higher level of security in their assets, as they typically display a greater propensity to make timely repayments. This stands in contrast to the challenges posed by corporate loans with significant ticket sizes, which have proven to be a recurring issue for banks over the last two decades. As a result, banks are increasingly shifting their focus towards personal lending.

A newly conducted study, exemplified by the “State of the Economy” publication, penned by esteemed personnel at the Reserve Bank of India, has revealed that the decrease in industrial lending starting from November 2022 has been primarily instigated by the diminution in credit availed by small and medium-sized enterprises, as well as larger industrial entities. This has resulted in a simultaneous reduction in the demand for credit related to infrastructure projects.

Business loans are subject to a high level of scrutiny by banks and are typically only granted to established, reputable, and financially secure large enterprises. Recent data shows that the banks’ credit portfolios have experienced a slowdown in lending to most industry categories, with the exception of large enterprises.

In comparison to the previous period, when industry loans increased by 7.5%, the growth rate slowed down to 5.7% in the current period. In specific sectors, lending to micro, small, and medium-sized businesses has seen a notable uptick, with a 12.3% increase for micro firms and a 19.6% increase for small and medium-sized firms, compared to the figures from the previous year of 23.3% and 54.4%, respectively. Meanwhile, there has been a modest increase in loan activity for larger corporations, rising from 2% to 3% during the period under evaluation.

As of March 24, 2023, bank deposits experienced a noteworthy increase of 9.1% year-over-year, exceeding the 8.4% growth recorded in the prior year. Notably, non-resident deposits saw an impressive surge from $2.4 billion to $6.4 billion between April 2022 and February 2023. On April 7, 2023, Scheduled Commercial Banks (SCBs) recorded a credit-deposit (C-D) ratio of 75.8%, up from 71.5% on April 8, 2022. The incremental C-D ratio soared to 142.2% in November 2022, before reducing to 110% by April 7, 2023, as stated by the authors. The incremental C-D ratio had previously dipped below 50% during the pandemic and remained low until the end of 2021.

State-run banks and private lenders are projecting a significant increase in loan growth for the current fiscal year based on data from the fourth quarter. This trend follows the pattern observed in the post-pandemic era. The Bank of India’s recent earnings report indicated that it expects loan growth in the fiscal year 2024 to be in the range of 11–12%. Similarly, Union Bank of India, which also released its January-March quarter results last week, anticipates credit growth to be between 10% and 12% for the upcoming fiscal year. These predictions are in line with what major private-sector banks have disclosed so far.

The extent of loan growth will depend largely on the changing growth environment, which is affected by local and international variables. If high-interest rates persist for an extended period, they may further constrain small businesses ability to borrow funds. Inflation trends and global market stability will be crucial factors to monitor in the near future. In an effort to minimize risk, banks are expected to prioritize retail loans and approach corporate loans with caution.

Proofread & Published By Naveenika Chauhan