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Credit growth slows to a crawl in both industry and services

Data released by Reserve Bank of India showed that gross bank credit, too, expanded by just 8.2 per cent in September — the lowest in 22 months. Gross bank credit witnessed double digit year-on-year growth in each of the months between April 2018 and July 2019.

Written by Sandeep Singh | New Delhi |
November 13, 2019 5:00:24 am
India expresses disappointment over lack of support for IMF quota increase The latest RBI data is in line with the slowdown seen in factory output over the last few months. (Express Photo by Tashi Tobgyal)

Reflecting the sluggishness in industrial activity, growth in bank credit to industries slowed to 2.7 per cent in September — the lowest in the last 12 months. This is after having recovered earlier this year to hit a four-and-a-half year high of 6.9 per cent in April 2019.

Data released by Reserve Bank of India showed that gross bank credit, too, expanded by just 8.2 per cent in September — the lowest in 22 months. Gross bank credit witnessed double digit year-on-year growth in each of the months between April 2018 and July 2019.

Importantly, the services sector, which led to the revival of credit growth and was witnessing the highest economic activity, is also witnessing a continuing slowdown in credit demand. While credit outstanding to the services sector grew in excess of 20 per cent y-o-y in each of the months between April 2018 and February 2019, it has been steadily declining since then. While it stood at 13.3 per cent in August, the growth rate fell to 7.3 per cent in September — the lowest in last two years.

For policymakers, the worrying fact is that the industrial and services sectors have not witnessed any credit expansion in the last six months.

As far as fund flow to industries is concerned, the credit outstanding contracted by 3.85 per cent over the last six months from Rs 28.85 lakh crore in March 2019 to Rs 27.74 lakh crore in September 2019. For the services sector, credit outstanding contracted by 2.2 per cent from 24.15 lakh crore in March 2019 to 23.61 lakh crore in September 2019.

The latest RBI data is in line with the slowdown seen in factory output over the last few months. Data released by the Ministry of Statistics and Programme Implementation (MoSPI) Monday showed that the factory output for September plunged to (-) 4.3 per cent, with all three sectoral constituents — manufacturing, mining and electricity — recording negative growth. This was the second consecutive month that the factory output witnessed contraction. The credit flow data is reflective of this trend.

The personal loan segment, however, was the exception to the rule and continued to do well with credit growth expanding by 16.6 per cent in September, RBI data showed.

While gross 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 government came to power in May 2014).

However, as the financial sector came under pressure following the NBFC crisis triggered by the IL&FS meltdown in the last quarter of calendar 2018 and demand in the economy weakened both from industry and consumer side, credit growth for banks started to soften and fell below 10 per cent in August 2019 declining further to 8.2 per cent in September.

Within the industrial sector, micro and small enterprises saw their credit outstanding contract by 0.7 per cent and the medium-sized enterprises saw credit outstanding shrink by 0.3 per cent. Large companies saw their y-o-y credit growth in September slow down to 3.4 per cent. It stood at 5.1 per cent in August and 7.2 per cent in July 2019.

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