In line with the slowdown in the economy on both the investment and the consumption fronts, the credit outstanding of scheduled commercial banks contracted by 0.9 per cent over the last five months, from Rs 86.74 lakh crore in March 2019 to Rs 85.94 lakh crore in August 2019.
According to the data released by the Reserve Bank of India, the decline has been led by contraction in credit outstanding for industrial segment (-4.2 per cent) and services segment (-2.7 per cent) in the five-month period. Even the personal loan segment has expanded by only 3.7 per cent since March 2019.
However, in the financial year ended March 2019, the credit outstanding for banks expanded by 12.2 per cent from Rs 77.3 lakh crore at the end of March 2018 to Rs 86.7 lakh crore in March 2019.
On the other hand, a look into the year-on-year credit growth data for banks show that the gross bank credit growth fell to 9.9 per cent in August 2019 — the lowest in 17 months, since it rose 8.2 per cent in March 2018. This, too, has been impacted by a sharp decline in credit demand from the industrial sector and relatively lower demand by services and personal loan segment.
While bank credit growth had hit a low of 3 per cent in February 2017, following demonetisation in November 2016, it witnessed a slow but steady revival over the next two years to hit a 55-month high of 13.6 per cent in November 2018 (the highest since Narendra Modi-led NDA came to power in May 2014).
However, as the financial sector came under pressure following the IL&FS crisis in the last quarter of calendar 2018 and demand in the economy weakened both from industry and consumers, the credit growth for banks started to soften and fell below 10 per cent in August 2019. It had grown by 11.5 per cent in July 2019.
In August, the year-on-year credit outstanding for the industrial sector rose by 3.9 per cent, a sharp fall over 6.1 per cent it witnessed in the previous month. Within the industrial sector the Micro and small enterprises saw their credit outstanding contract by 2.1 per cent and it is the biggest decline since February 2017 when it contracted by 4.9 per cent. The medium sized enterprises saw the credit outstanding shrink by 0.8 per cent while the large companies saw their y-o-y credit growth in August soften to 5.1 per cent, down from 7.2 per cent in July 2019.
Analysts say that the decline in credit demand by the industrial sector is on account of slowdown in consumption in the economy. “A decline in consumer demand is not only deferring fresh investment, but is now leading to decline in existing capacity utilisations and hurting medium and small companies much more,” said the head of research with a leading brokerage firm.
Another sign of slowdown, weak credit demand
Contraction in credit outstanding of banks reflects weakness in credit demand from both the industry and individuals and it is reflective of the slowdown in the market. While individuals are not borrowing for consumption purposes, companies are deferring their investment for lack of adequate demand in the economy.
Among the sectors, the infrastructure segment, which was the primary driver for industrial credit demand in this calendar year, saw a sharp dip in credit growth in August.
While the credit outstanding rose by 14 per cent in July 2019, in August the growth slipped to 8.8 per cent.
Besides, the services and the personal loan segments have also seen softening in credit demand. If the services sector witnessed a high growth of 28.1 per cent in November 2018, it has now come down to 13.3 per cent in August. Similarly, the personal loan segment that saw its credit outstanding expand by 15.6 per cent in August, the lowest in 11 months.