Amidst all the din about the rising cost of living and a possible global economic recession, the news about a pickup in non-food credit growth often gets ignored. After a lacklustre mid-single digit growth over a two-year period, non-food credit growth has picked up steam. Data collected by the RBI from 33 scheduled commercial banks (accounting for ~90% of the total non-food credit employed) shows that as of the first fortnight of Jun-22, outstanding credit has grown a healthy 13.7% YoY to Rs 121 trillion.

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

Retail Sector

As the charts below shows, the brightest spot continues to remain the retail loan segment. Constituting around 29% of the total non-food credit, this segment has grown by a rapid 18% YoY. In fact, retail loans have never quite seen a slowdown even during the pandemic, having grown in double digits in the previous two year period. Within the retail loan segment, while housing loans have grown by a steady 15% YoY, vehicle loans, credit cards and consumer durables have been the main drivers. This would indicate continued traction in urban middle/upper class consumption as this was the segment which was relatively less impacted by the pandemic. However, one should also remember that higher prices of vehicles and durables following higher commodity prices is also a factor at play here.

Industrial Sector

Now coming to the industrial sector (16% of total non-food credit), the growth appears relatively muted at 9.5% YoY. However, if one just scratches the surface, one will see that credit to medium, small and micro enterprises have jumped 34% YoY over the last one year. As one would recall, these segments were the most impacted by the pandemic. The recovery in economic growth coupled with the MSME package of Rs 3 trn (lakh crs) announced by the government during the pandemic period have helped this sector to come out of stress.

• Looking at a slightly more granular level, some of the industries that have driven credit growth have a large number of MSMEs as part of their value chain. These include food processing, drugs and pharmaceuticals, rubber and plastic products and electronics. In this context, we believe regional banks having a niche customer base within the MSME segment should do well going forward.
• Within the industrial sector, growth in credit for the infrastructure segment (38% of industrial sector loans) has been driven by sectors like telecommunications and roads. While the telecom sector has been debt laden for a long time, the future will not be very different given the huge investments needed in setting up a 5G ecosystem. Investment in road building is one of the few bright spots as far as building infrastructure is concerned. With the pace of execution picking up, credit growth has been a robust 18% YoY in the last one year despite a high base of 30%.

Services Sector

In the services sector (25% of total non-food credit), growth has been a steady 12.8% YoY. Not surprisingly, this has been driven by a 15-18% YoY growth in the retail and wholesale trade segment. Just like the MSME sector, trade activities also slowed down during the pandemic.

The moot question that now arises is whether this growth is sustainable or may just turn out to be short lived given the prospects of higher interest rates going forward and a likely decline in commodity prices. 

Our View

The medium-term prospects for credit growth look promising due to the following reasons –

1. With urban consumption growth picking up, we can expect the retail loan segment to continue to do well. One of the factors leading this is the domestic IT sector which has seen higher recruitments and a jump in average salary levels. Traditionally, the fortunes of the IT industry have been an important 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 last 12-18 months. This should ideally translate into higher remittances into India which is also a key driver for personal consumption in some states.
2. The recent pickup in real estate activities after a long slump should also continue for some more time thus driving growth in housing loans at least in urban areas.
3. On the capital expenditure front, the next few years will see major investments in sectors like chemicals and pharmaceuticals (China plus 1 factor), defence equipment and electronics (government’s push to become “Atmanirbhar”), roads, railways (new orders for wagons, locomotives and passenger coaches), sugar (ethanol plants), paper, renewable energy (solar and wind parks), cross-country gas pipelines (and related infrastructure like CNG stations) and oil refining and petrochemicals (IOC, HPCL).
4. The slew of PLI schemes announced by the government for 14 sectors till date will be another driver for new investments in sectors like auto and auto ancillary, textiles/apparel, white goods, electronics and IT hardware, pharmaceuticals etc. Investments by large industries will in turn drive MSMEs serving these sectors to follow suit.

Conclusion

Given the fairly comfortable or improving stressed asset (NPA) book for many private and public sector banks, they can be a bit more aggressive about growth. Without this buffer, bank credit growth could have slowed down in a rising interest rate scenario. In addition, with margins for NBFCs likely to contract due to rising interest rates, banks with their low-cost liabilities are better placed to drive credit growth going forward. In summary, we would believe that barring an unforeseen event like Covid, the domestic banking sector is able and willing to take advantage of the ample opportunities for credit growth.