Non-food bank credit growth remains sombre in June
The credit to the industry has been slowing down, since September 2016. In October 2016, it contracted by 1.7 per cent for the first time. This can be partly accredited to the twin balance sheet problem that is, highly indebted companies and banking systems afflicted with rising non-performing assets (NPA). While the remaining was due to a slowdown in credit demand post demonetisation.
The bank credit in India denotes credit lending by various scheduled commercial banks (SCB) to various sectors of the economy. The bank credit is pigeonholed into food credit and non-food credit. Food credit is where the lending is made by banks to Food Corporation of India (FCI) mainly for the procurement of foodgrains. It contributes a small share of the total bank credit. The majority contribution towards the bank credit comes from the non-food credit that comprises of credit to various sectors of the economy such as agriculture, industry, services, and also in the form of personal loans.
With a slight change from May level, the growth in the non-food bank credit (NFBC) continued to remain subdued at 6.7 per cent YoY in June. Compared to its prior months, the data for retail credit that is, home loans, vehicle loans, and credit cards scaled up slightly as the economic activity began to revive in June. After shrinking for two months, the overall growth in retail loans stood at 2.2 per cent YoY in June, which is up from 1.9 per cent YoY in May.
The growth in the credit to industries jumped by 2.2 per cent YoY, compared to 1.7 per cent YoY in May 2020. The months of April and May witnessed dull economic activity due to the pandemic persuaded lockdown measures. This posed many new challenges to banks in disbursing new credit. As the outstanding loans towards many sectors have remained flat, the risk averseness of the banks is clearly visible. Further, even the credit growth to micro and small enterprises as well as growth in credit to services drowned.
In the upcoming Reserve Bank of India’s (RBI) policy meeting, analysts are expecting more rate reductions on reverse repurchases (Repo) side. In order to nudge banks to lend more, RBI had cut reverse repo rate by 25 bps to 3.75 in April. To pin down the trend in retail inflation, RBI should review the economy and also look at the transmission effects of the earlier rate cuts.