In a first, personal loans are set to account for most of incremental growth in non-food bank credit during 2017-18.
According to the Reserve Bank of India (RBI) data on sectoral deployment of bank credit, personal loans, which include home, vehicle and education loans, accounted for a record 96 per cent of incremental non-food credit in the last financial year till February 16. This is more than double their share in incremental bank credit growth in the previous two years.
Personal loans accounted for 41.6 per cent and 41.5 per cent of incremental credit growth during FY17 and FY16, respectively, (see the adjoining chart). Sectoral RBI data for all of FY18 is not available yet.
Analysts attribute this largely to a slump in fresh investment by the corporate sector, hitting industrial credit demand. “This is not surprising given the recent trend in bank credit where corporates have nearly stopped taking loans and retail credit is now the only major segment that is growing for banks,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.
Sinha expects the trend to persist for at least a few more quarters in view of the slump in capital expenditure by the corporate sector. “There is not much of a demand for industrial credit right now, but households and individuals continue to take fresh loans as the services sector (of the Indian economy) continues to grow,” he added.
Upward trajectory: Incremental growth in bank’s personal loans and share in non-food credit
Non-food credit was up by Rs 2.44 trillion during the first 10-and-a-half months of FY18, ended February 16, 2018. Of this, Rs 2.34 trillion was accounted for by personal loans. This translated into annualised growth of 17.6 per cent in personal loans during FY18.
According to the RBI’s classification, loans for consumer durables purchases, vehicle/car loans, education loans, credit card debt, loans against bank fixed deposits, loans against shares and other personal loans are all clubbed as personal loans.
In comparison, credit to industry was down by Rs 528 billion during the period, while credit to the agriculture and allied sector was up by Rs 244 billion.
Total non-food credit was up by Rs 5.48 trillion during FY17, of which Rs 2.61 trillion was accounted for by personal loans.
Experts, however, expect a decline in the share of personal loans once the full-year data is available. “Historically, there is an uptick in industrial and other institutional credit during the last quarter of the fiscal year, which would lower the 96 per cent growth,” said G Chokkalingam, MD, Equinomics Research & Advisory Services.
Economists see it as a further rise in the share of private consumption in the economy. “Consumption growth has been central to India’s economic growth in the last few years and it seems the trend has only got stronger. Over time, this should lead to an improvement in capacity utilisation in the manufacturing sector, triggering fresh investment,” said Devendra Pant, chief economist and head of public finance, India Ratings.
For others, it is a sign of growing household leverage in India as the underlying growth in personal income, including salary and wages, is much lower than the headline growth in personal loans. “Data for listed companies suggests that salary and wages are growing at 5-6 per cent a year, against 18-20 per cent annualised growth in personal loans. This could turn into a headwind for banks
if consumer inflation spikes or if there is a sudden depreciation in the rupee,” said Sinha.
India Ratings, however, discounts these fears given the low leverage ratio for Indian households compared to their global peers. “It is true that leverage ratios are growing in India, but Indian households are starting from a very low base and the outstanding loan to income ratio has to rise to a very high level, say 100 per cent or so, for it to reach a crisis point,” Pant said.