Credit growth at five-year low — will it scale back?

Markets may be gung-ho about the green shoots popping up in the economy. But banking credit, a powerful indicator of the country’s economic activity, is yet to show concrete signs of a pick-up.

Banking credit growth has plunged to 10.9 per cent as on August 31, 2014, the lowest in the last five years. The last time credit growth had dipped to similar levels was during November-December 2009, post the 2008 financial crisis.

Growth then sprung back to life by the end of the fiscal 2009-10, soaring to 17 per cent. So can history repeat itself? The jury is out on this one.

Prolonged slowdown

The Indian economy has been through one of the longest periods of economic slowdown. The banking sector, whose fortunes are directly linked to the state of the economy, has been hit hard.

Over the last two years, the credit growth of banks has slipped substantially. In 2012-13 and 2013-14, the credit growth slowed down to 13-14 per cent, after growing at 22 per cent annually since 2004-05.

GDP growth

Banking credit is a function of growth in the gross domestic product (GDP). Over the last ten years, credit growth has been 2.5 to 3 times the real GDP growth in the economy. Thus, with the economic growth hitting a low of 4.7 per cent in 2013-14, the loan growth also slowed down to 14 per cent.

Now, with the growth in GDP expected to scale up to 5.5-5.8 per cent in 2014-15, the market is betting on banking credit to pick up too. While many bankers expect the credit growth to claw back to 13-14 per cent in 2014-15, there are some who feel that the heady days of 20 per cent-plus credit growth may not return soon.

Nominal GDP

This is because, while banking credit grows at a certain multiple to real GDP growth, the nominal GDP, which takes inflation into account, matters more. It is the nominal GDP which decides the credit requirement of a corporate — the ones who contribute to credit growth, says Jaideep Iyer, Group President - Financial Management, YES Bank.

With inflation likely to head down over the next three to four years, nominal GDP growth may not pick-up substantially.

“While the growth in real GDP may claw back to 5.5-6.5 per cent over the next 3-4 years, inflation is likely to trend down to 6-7 per cent. Hence nominal GDP may not grow significantly,” says Jaideep.

Over the last five years, with inflation been ruling high, credit growth has been about 1-1.2 times of nominal GDP. The nominal GDP growth was 12.3 per cent in 2013-14.

​Sluggish corporate investment

The slowdown in overall credit growth has primarily been on the back of a slowdown in investment activity by corporates. The growth in this segment has slipped to 10 per cent from 16 per cent last year. With a number of large projects stalled, corporates are in no hurry to put up new capacities.

“Economic data points are still mixed and do not provide enough signals of sustainability in growth indicators. As Indian corporates have burnt their fingers earlier, they may not like to rush into expansion or modernisation projects,” says Dr Rupa Rege Nitsure, Chief Economist and General Manager, Bank of Baroda.

Unless the critical issues pertaining to land, labour and power availability get sorted out, they may not like to borrow more and add to their leverage, she adds.

But it is not just companies that are reluctant to borrow to put up new capacities. Banks have turned wary too. Stressed loans in the banking segment are above 11 per cent of loans. Banks have become selective in project lending, avoiding risky assets.

“Banks too have become more cautious and sensitive to risks. As Indian banks are in the process of adopting a more stringent risk-management framework — Basel III, their focus has changed to capital conservation”, says Dr Nitsure.

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