Composition of bank credit has witnessed substantial change over time: RBI’s monetary policy report

The composition of bank credit has witnessed substantial change over time, with an increasing proportion of credit now going to services and retail loans relative to industry, according to the RBI’s monetary policy report.

Personal loans now form the biggest component of bank credit (at 32.1 per cent of outstanding credit), followed by services (28.4 per cent), industry (26.2 per cent) and agriculture (13.3 per cent). This is as per RBI data on sectoral bank credit as of March 2023.

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Shift in composition

A decade ago (March 2013), industry accounted for the biggest component of bank credit (at 46 per cent of outstanding credit), followed by services (24 per cent), retail (18 per cent) and agriculture (12 per cent).

The shift in composition in the last decade comes against the backdrop of retail loans (including housing, vehicle, credit cards and advances against fixed deposits) push by banks. Further, non-banking finance companies, including housing finance companies, and trade (wholesale and retail) tapped banks for loans in a big way, leading to an increase in credit to the services sector.

The modest growth in loans to the agriculture segment comes in the wake of the Government setting yearly targets for credit growth.

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The proportion of credit to industry within overall credit may have declined as large corporates are increasingly tapping alternative funding sources such as bonds and external commercial borrowings.

Banking expert V Viswanathan observed that the decline in credit to industry is a matter of concern.

“While manufacturing credit results in capital formation and assured recurring revenue, credit to services might result in recurring revenue but does not result in capital formation, which is essential for economic growth.

“Retail credit, other than housing and vehicles (which aid real estate and transport segment growth), growth in other sub-segments such as unsecured, credit card, gold loan, etc neither lead to capital formation nor generate recurring revenues,” he said., adding from economic growth point of view, the shift in composition of credit is a matter of concern.

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“As far as banks are concerned, they look at retail and service segments more since credit scoring models are enough for financing. There is no need for expertise or to analyse credit needs. Plus, the interest margins are attractive.

“But when the downturn starts and bad loans soar, things could take a turn for the worse in respect of services and unsecured portfolios, as no tangible assets will be available. NBFC failures and micro finance company failures in the past demonstrate that,” Viswanathan said.

Positive outlook

Meanwhile, CARE Ratings, in a report, said the outlook for bank credit offtake continues to remain positive for FY24, supported by factors such as economic expansion and a continued push for retail credit, which has been supported by improving digitisation.

The credit rating agency estimated credit growth to be in the range of 13.0–13.5 per cent for FY24, excluding the impact of the merger of HDFC with HDFC Bank. The personal loan segment is expected to perform well compared to the industry and service segments in FY24.

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