Banking system credit growth is on track, but how long will the good times last?


By Jaspreet Singh Arora

Amid all the din of rising costs of living and a possible global economic downturn, news of a pick-up in non-food credit growth is often ignored. After lackluster mid-single-digit growth over a two-year period, growth in non-food credit accelerated. Data collected by the RBI from 33 regular commercial banks (representing about 90% of total non-food credit employed) shows that in the first half of June 22, outstanding credit increased by 13.7% year-on-year to reach 121 trillion rupees. .

The percentage should not be scoffed at, as it marks a two and a half year high clearly indicating that growth has rebounded to pre-Covid levels. Before determining whether or not this trend is sustainable, let’s first analyze in a little more detail which segments are driving this growth.

Distribution sector

As the charts below show, the brightest segment remains the retail lending segment. Constituting about 29% of total non-food loans, this segment experienced rapid growth of 18% year-on-year. In fact, retail lending never really slowed down, even during the pandemic, after growing in double digits the previous two years. In the personal lending segment, while home loans were up 15% year-on-year, auto loans, credit cards and consumer durables were the main drivers. This would indicate continued traction in middle/upper class urban consumption, as this is the segment that has been relatively less impacted by the pandemic. However, it should also be remembered that rising vehicle and durable goods prices following rising commodity prices are also factors at play here.

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Industrial sector

Turning now to the industrial sector (16% of total non-food loans), growth seems relatively moderate at 9.5% year-on-year. However, if we only scratch the surface, we will see that credit to medium, small and micro businesses has jumped 34% year-on-year over the past year. As a reminder, these segments have been the most impacted by the pandemic. The revival of economic growth coupled with the MSME package of Rs 3 trn (lakh crs) announced by the government during the pandemic period has helped this sector to come out of stress.

  • At a somewhat more granular level, some of the industries that have driven credit growth have large numbers of MSMEs in their value chain. These include food, drug and pharmaceutical processing, rubber and plastic products, and electronics. In this context, we believe that regional banks with a niche clientele within the MSME segment should do well in the future.
  • Within the industrial sector, credit growth for the infrastructure segment (38% of industrial sector loans) was driven by sectors such as telecommunications and roads. While the telecom sector has been in debt for a long time, the future will not be much different given the huge investments required to establish a 5G ecosystem. Investment in road construction is one of the few bright spots when it comes to building infrastructure. With the pace of execution accelerating, credit growth has been solid at 18% year-on-year over the past year despite a high base of 30%.

Service sector

In the services sector (25% of total non-food loans), growth was stable at 12.8% year-on-year. Unsurprisingly, this was driven by 15-18% year-on-year growth in the retail and wholesale segment. Just like the MSME sector, business activities have also slowed down during the pandemic.

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The debatable question now is whether this growth is sustainable or may simply prove short-lived given the outlook for higher interest rates in the future and a likely decline in commodity prices. .

Our point of view

The medium-term outlook for credit growth looks promising for the following reasons:

  1. With the resumption of urban consumption growth, it can be expected that the retail lending segment will continue to do well. One of the factors driving this development is the national IT sector, which has seen an increase in recruitment and an increase in average salary levels. Traditionally, the fortunes of the computer industry have been a major driver for real estate, personal vehicles and consumer durables in certain regions. With crude oil prices remaining firm, many Middle Eastern economies have seen better growth over the past 12 to 18 months. This should ideally result in increased remittances to India, which is also a key driver of personal consumption in some states.
  2. The recent recovery of real estate activities after a long period of crisis is also expected to continue for some time, leading to growth in housing loans, at least in urban areas.
  3. On the capital expenditure front, the next few years will see large investments in sectors such as chemicals and pharmaceuticals (China plus 1 factor), defense equipment and electronics (government push to become “Atmanirbhar “), roads, railways (new orders for wagons, locomotives and passenger cars), sugar (ethanol plants), paper, renewable energies (solar and wind farms), transnational gas pipelines (and related infrastructure such as CNG stations) and oil refining and petrochemicals (IOC, HPCL).
  4. The multitude of PLI schemes announced by the government for 14 sectors so far will be another driver for further investment in sectors such as automotive and automotive accessories, textiles/clothing, white goods, electronics and computer equipment, pharmaceuticals, etc. Investments from large industries will incentivize MSMEs serving these sectors to follow suit.


Given the fairly comfortable or improving portfolio of stressed assets (NPA) for many private and public sector banks, they may be a bit more aggressive in growth. Without this buffer, bank credit growth could have slowed in a scenario of higher interest rates. In addition, with NBFC spreads likely to shrink due to rising interest rates, banks, with their low-cost liabilities, are better positioned to drive credit growth going forward. In summary, we believe that barring an unforeseen event like Covid, the domestic banking sector is able and willing to take advantage of the many opportunities for credit growth.

(Jaspreet Singh Arora is the Chief Investment Officer (CIO), Research & Ranking. Opinions expressed are those of the author.)


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