India & Bank Credit:The current situation

Credit is the real king. It is credit that can multiply the reserve money into broader money and cause the economic growth. Without sufficient credit, business expansions and economic growth may get stifled. Due to this, for any economy, credit growth is a key indicator of growth. For India, which is a capital scarce economy, credit is even more critical.  

The volume, direction, composition, and changes of credit explain significant aspects such as growing sectors, fund absorbing sectors, growth pace, and shift of credit among the sectors.  

The current total bank credit is Rs. 265 trillion of which 87.5% is funded by deposits. The balance is funded by equity, borrowings from Reserve Bank of India (RBI), and other sources.  The total current account and savings account (CASA) deposits are 36% although CASA was 50% plus in the past decade. However, as per the latest data of RBI, the share of core demand deposits is 13% and time deposits is 87%.

On deployment side, the share of investments in government and other securities is 25% and lending is 69%. The balance 6% is in other assets. The credit composition is 12.5% to agriculture, 21.4% to industry, 27.7% to services, 6.4% to trade, 3% to commercial real estate, 8.5% to NBFCs, and 33.4% to personal loans.

Currently priority sector lending (PSL) is 45%, 5% higher than mandatory 40%. Within PSL, agriculture is 12.4%, MSME 16.7%, weaker sections 10%, housing loans 5% and balance 0.9% to other priority sectors.

Historically, credit growth in India is 13% to 20%. However, at present it is only 8%. Similarly, against 28% to 30% historical share of personal loans, the current share of personal loans is 33.4%.

Housing loans are included in personal loans and also in PSL. Housing loans in personal loans are 16.7% and consistent over years. Housing loans in PSL decreased in the last 2 years by 50 bips but has picked up in the last quarter.

The credit composition in other comparable countries has broadly been the same except for few percentage differences. However, in US, UK, Brazil, Australia, Singapore, China, and Germany, the personal loans usually are about 12% to 18% against 30% in India. Lending to commercial real estate is higher by 5% when compared to India. In those countries, agricultural loans are similar to industrial loans and when clubbed the share is same as in India.

Unlike other countries, bank credit in India includes 1% food credit which is regulated and meant for procurement of food grains. Further, India has higher mandatory PSL. Non banking financial companies (NBFCs) in India absorb about 8.5% of total banking credit unlike in other countries where NBFCs mobilize funds directly from the markets.

Unlike in India, the credit demand in US is lower as businesses in US are mostly dependent on capital markets. The credit in China is mostly regulated with government banks dominating the lending activity. Brazil has wild economic and credit cycles. Credit in Singapore is mostly dependent on corporate loans and trading.

The credit to Gross Domestic Product (GDP) ratio explains if the financial sector is adequately funding the economic growth. India GDP being Rs. 331 trillion, the credit to GDP ratio is 80% which is moderate with scope to extend by 20 percentage points.

The profitability of bank credit is the net interest margin (NIM). Singapore, UK, Germany, Australia, and China have lower NIMs of 2.5% whereas NIM for US, Brazil, and India are 3.5%. The credit is healthy when the non performing loans /assets (NPAs) are less. Brazil has high NPAs at 4%. UK, Australia and Germany have NPAs of 2.5%. US, China, and Singapore have lower NPAs of 1.5%. NPAs of India improved from 9% five years ago but are still 2.5%. The cost to income ratio of Indian banks is higher at 47% implying that nearly half of banks income is consumed by operating costs.

Overall, although Indian banks share same league as their counter parts in other countries, they ought to contribute towards higher credit to GDP, reduce NPAs, reduce cost to income ratio, and increase branch footprint.

Disclaimer:

Dr. Kishore Nuthalapati is an Economist and a Corporate Finance Professional. Dr. Kishore is the Regional Director of PRMIA, US for Hyderabad Chapter covering Telangana and Andhra Pradesh. He is serving as the CFO of BEKEM Infra Projects Pvt Ltd, Hyderabad, India. Views are his personal and do not reflect those of any of the organizations he is or was associated with.