Risk averse private lenders behind India’s declining credit growth
2 min read . Updated: 02 Mar 2021, 01:15 PM IST- RBI said non-food credit growth of private sector banks slowed to 9% in November 2020 compared with 13.5% a year ago
Private sector banks are the reason for the slowdown in credit growth during the pandemic period, said the Reserve Bank of India (RBI) in its February bulletin. Analyzing credit growth during the pandemic, RBI said non-food credit growth of private sector banks slowed to 9% in November 2020 compared with 13.5% a year ago. At the same time, public sector banks (PSBs), which account for around 65 per cent share in non-food credit, reported a higher growth of 5.2% in November 2020 compared with 4.5% in November 2019.
While state-owned banks have seen an increased growth in credit to agriculture and services sectors during this period, they have also been instrumental in the contraction in the overall industrial credit. Credit to industries has seen a decline since April 2019 with credit growth turning negative in October 2020. While credit growth to large industries slowed, credit to micro and small industries have seen a moderate increase. Private sector banks had witnessed a double-digit growth in industrial credit till June 2020 but saw a decline thereafter.
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Another sector which was worst affected by the pandemic is personal loans, led by housing loans and credit card outstanding. Private sector banks, which were in the forefront in the personal loans segment, have seen a sharp decline in credit offtake in this sector. Personal loans, which saw a sharp uptick in growth in November due to the festive season, slumped going ahead. While housing loans contributed to over 50% of personal loans growth in November, it moderated thereafter. However, RBI expects signs of a turnaround, pointing to the spurt in property purchases in the recent period.
Unlike other sectors, services sector has bucked the trend and reported accelerated growth. Within services, credit to transport operators, trade, hospitality saw a pick-up in growth while non-banking financial companies (NBFCs), which constitutes the single-largest constituent of services sector, saw a sharp deceleration in growth. The NBFC sector, which was worst affected by the Infrastructure Leasing and Financial Services (IL&FS) crisis, was further impacted by the pandemic. Private sector banks had sharply reduced their lending to the services sector during the pandemic, but it has picked up pace now.
“My main point here is that while many economic indicators are back to pre-covid levels, credit growth remains subdued. Had it not been for the MSME financing, credit growth would have been even weaker. Some argue credit is a lagging indicator. Even if it is, one thing is clear—we cannot see sustained recovery without credit growth picking up. Credit multiplier now is running below 1," said Suresh Ganapathy, banking analyst, Macquarie Capital in his note.
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