Editorial. RBI should take note of uneven credit growth

Of late, strong growth in gross bank credit has been among the prominent indicators reflecting the resilience in Indian economy. But a closer look at the numbers show that the growth is not even across sectors with many segments witnessing declining credit deployment. Growth in gross bank credit is currently at an 8-year high; moving up from 8 per cent in January 2022, to 17.2 per cent now.

The RBI Governor pointed out after the recent monetary policy that non-food bank credit rose ₹10.6 lakh crore between April- November this year when compared to ₹1.9 lakh crore in the same period last year. Total flow of resources to the commercial sector has also more than doubled in this period. This growth has been led by services sector, which recorded 20 per cent increase in outstanding loans in September 2022, compared to the corresponding month last year, as demand for services revived with the ebbing of the pandemic.

Growth in industrial loans to micro, small and medium industries has also been very robust at over 27 per cent, implying that smaller companies are witnessing an increase in demand, making them take more loans. However, a closer look at the industry-wise credit deployment between April and September this year, shows that credit has flowed to handful of industries such as infrastructure, petroleum and coal products, power, chemicals and metals. Many industries such as sugar, textiles, edible oils, gems and jewellery, and food processing have witnessed a reduction in the loans outstanding, pointing towards continued distress. Loans to individuals across categories have shown strong growth at 19.6 per cent. This casts doubts on the quality of consumption which is driving the economy. If consumption spending is based on borrowings, it could lead borrowers into a debt trap. Banks are also at higher risk due to 27 per cent growth in credit card loans and 24 per cent increase in personal loans, which are unsecured.

Besides the uneven flow of credit, there are couple of other issues which regulators need to note. While credit growth is currently over 17 per cent, growth in aggregate deposits is much slower at 9.2 per cent. If credit demand continues to soar, banks will have to garner more deposits, mostly by hiking rates thus hurting margins. Need for additional capital for banks is also likely to grow if deposit growth remains slack, adding pressure on the fisc. Also, the transmission of the 190 basis points rate hike done between May-October 2022 is not completely reflected in lending rates yet. The weighted average lending rate on fresh rupee loans has moved only 108 basis points higher in this period. As the rate hikes are transmitted to loans with a lag effect, credit growth is likely to be impacted going ahead. The overall situation needs close watching.

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