If consumption was driving the economy, and credit growth in personal loan segment (including loans for consumer durables, housing, vehicle purchase and credit card spend among others) stood strong, data accessed from Reserve Bank of India shows that the 50-day demonetisation period had a significant impact on the credit demand in the personal loan categories.
According to the RBI data, while credit growth from the banking sector for the personal loan category ranged between 17 and 20 per cent in the first 10-months of calendar 2016, it slipped to 15.2 per cent in November and further declined to 13.5 per cent in December 2016.
Economists and experts say that there was a decline in consumption in November and December as people were uncertain about spending after the government announced to withdraw the legal tender character of old Rs 500 and Rs 1,000 notes.
Despite the slowdown in the pace of growth, the personal loan segment, however, is the only segment that continues to witness a double digit credit growth.
While the gross bank credit declined to 3.3 per cent in December and industrial sector witnessed a contraction of 4.3 per cent in bank credit, the personal loan segment grew by 13.5 per cent. The services witnessed a growth range of 7.1 per cent in November and 8.3 per cent in December and is lower than the growth of 9.1 per cent seen in December 2015 and much lower than the growth seen in August and September 2016 as the credit growth for the sector stood at 12.1 per cent and 18.4 per cent respectively.
Within the personal loan segment, the credit demand for housing (accounting for more than 50 per cent of personal loan outstanding) slipped to 14.8 per cent in December, down from 18.6 per cent in November 2015 and 19.3 per cent in December 2015. The second largest component — other personal loans — saw growth decline from 23.2 per cent in December 2015 to 12.9 per cent in December 2016.
Together, the two components — housing loan and other personal loans — account for 75 per cent of the total outstanding within the personal loan segment.
It is not just the personal loan segment which witnessed a decline. The gross bank credit for the banking sector decline from 6.4 per cent in October to 4 per cent in November 2016 and 3.3 per cent in December 2016. The decline in the credit to the industrial sector only became more steep in the demonetisation period. Data shows that the credit to the industrial sector that contracted by 1.7 per cent in October, contracted by 3.4 and 4.3 per cent in November and December 2016 respectively.
In fact, November and December 2016 also witnessed a decline in credit card spends. A senior official with a leading private sector bank told that while the bank witnessed a rise in the number of transactions on its cards in the two month period, there has been a decline in value terms.
“We have noted that because of the cash problem, people are using their debit and credit cards for low ticket items but there has been a sharp decline in spends on big ticket items such as purchase of consumer durable items. People are deferring their large ticket purchases and it is leading to a slowdown in the near term,” he said.
While many experts pointed that individuals practiced caution during the demonetisation, even the Economic Survey said it had some impact.