Amid economic revival, credit growth continues to flash red

Market


High frequency data, from electricity consumption to tax collections, have been showing encouraging signs of revival in economic activity post the second wave. Some indicators such as rail freight and electricity are already at pre-pandemic levels. But one indicator is still flashing red—bank credit growth.

Credit growth is still in low single digits with banks able to expand their loan book by just 6.7% as of August at the aggregate level. This is the same level where credit growth was during the lockdown months of April and May last year. This shows that there has been hardly any improvement after the initial drop from 19% in March 2020. Loan growth fell across segments with deceleration in loans to industry, retail and even services.

Disaggregated data from the Reserve Bank of India (RBI) shows that the services sector experienced the sharpest deceleration in the wake of the second wave. As the adjoining chart shows, loans to services grew by 3.5% in August, a sharp fall from 10.25% growth in August 2020.

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In fact, in the aftermath of the first wave, loans had shown faster growth. The second wave has been debilitating for the services sector because a large part of it is unorganized. Smaller outfits and companies have been pushed into bankruptcy due to the second wave. As such, incremental credit flow between April and August was a negative 2,108 crore. In other words, more loans were paid back than availed.

To be sure, credit flow to industry has remained tepid too. However, the weakness here has been prolonged for several quarters now and is not a manifestation of the pandemic alone. Even as the overall loan growth has been anaemic, small and medium firms have taken more loans under special schemes. Growth here has accelerated post the pandemic. But the continued deleveraging by large companies meant that overall credit flow has been negative.

The key driver of loan growth has been retail for many years now. Ergo, the deceleration has also been largely because of a drop here. Even as the festive season holds out hopes of a recovery here, corporate deleveraging will continue to weigh. For bank loan growth to look up, credit-linked investment is key.

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