ANALYSIS. Demonetisation to hit bank credit growth

Credit growth has always been closely linked to the pace of economic growth. The recent cut in GDP growth forecast by rating agencies, brokerage houses and the latest by the RBI will hence directly impact the growth in bank lending.

Given that bank credit has grown by a smaller multiple to the growth in GDP in recent years than in the past, lower-than-expected growth in GDP can only make matters worse.

On an average, the credit growth has been 2.5-3 times the real GDP growth in the past. The multiple has shrunk to 1.2-1.4 times over the last three years.

During the high growth periods between 2004-05 and 2007-08, when growth in GDP was a robust 8-9 per cent, credit demand had been strong. Bank credit then grew by 25-30 per cent year-on-year, at about three times the real GDP growth.

As GDP growth fell, credit growth too slipped to 14-16 per cent levels in 2011-12 and 2012-13. But the growth in lending was still 2.5 times the growth in GDP.

Over the last two to three years, the long spell of economic slowdown has no doubt dragged down credit growth.

But what has made matters worse is that lending has grown at a slower pace in relation to the already lacklustre growth in the broader economy.

Bank credit growth has ranged between 1.2 and 1.4 times the GDP growth over the past two years, mainly due to the weak credit offtake at public sector banks.

In the boom period before the 2008 financial crisis, both private and State-owned banks grew their loan books at a similar multiple (about three times) to the GDP growth. But in the last three years, public sector banks (PSBs) have grown at a far slower pace, because of their huge exposure to the corporate segment — 40-50 per cent of lending is to large corporates.

Credit growth of PSBs plummeted to 7 per cent in 2014-15 from 13-14 per cent in the previous two years.

In 2015-16, PSBs’ credit growth slipped to a meagre 3.2 per cent, 0.4 times the growth in real GDP.

In contrast, private sector banks were able to clock a robust 26 per cent year-on-year rise in lending in 2015-16, amounting to 3.5 times the growth in real GDP.

Lower-than-expected growth in GDP can hurt bank credit even more.

Growth in GDP post-demonetisation has been marked down by various rating agencies and brokerage houses to 7 per cent levels for 2016-17.

Considering a 1.2 to 1.4 times multiple, bank credit can at best grow by 8-9 per cent this fiscal.

For the next fiscal, even if GDP growth picks up pace to 7.7-8 per cent levels in a best case scenario, credit growth will likely continue to languish at 10-11 per cent.

Also, while bank credit grows at a certain multiple to real GDP growth, the nominal GDP, which takes into account, inflation, matters too.

With inflation heading lower, the gap between real GDP and nominal GDP has been shrinking.

Pre-2008, while real GDP grew by 8-9 per cent, nominal GDP rose by 14-16 per cent. In 2015-16, due to lower inflation, nominal GDP grew by 8.7 per cent, even as real GDP recorded a 7.6 per cent growth.

Lower growth in nominal GDP can affect bank credit growth, because it in turn decides the credit requirement of a corporate.

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