Posted: Date Posted – 12:47 AM, Sun – 15 May 22

By B Sambamurthy

Real GDP reached a ten-year high of 8.2% in 2016-2017. Since then, it has been declining and fell to around 4% in 2019-20. Covid-19 inflicted significant damage to economic growth and growth fell to 6.5% in fiscal year 2021.

Regardless of the impact of Covid-19, decelerating economic growth has been placed almost on the verge of weak bank credit growth in recent years. The government and the Reserve Bank of India (RBI) have been urging banks to step up lending to spur economic growth and rightly so.

Slower credit growth and economic growth

Bank credit growth reached a ten-year high of 14% in 2012-2013 and has slowed since then, reaching a low of 5.5% in 2020-21, setting off alarm bells in government corridors. There is both coincidence and correlation between credit growth and economic growth.

The government and the RBI have launched a series of measures (still ongoing) to support credit growth and hence economic growth. These measures include massive dollops of liquidity, liberal refinancing lines, a credit guarantee (up to 20%) for MSMEs and the recapitalization of PSU banks. Bank credit grew by around 8% in 2021-22.

A brief review of bank credit growth in 2021-22 reveals successes and failures

Personal loans: Rs 35 lakh crore

The personal loan segment emerges as a big winner, continuing its fastest growth over the past decade. With an exceptional level of Rs 35.2 lakh crore (see table), it leaves behind a big industry credit (Rs 25.70 lakh crore) per miles. It rose more than 12.5% ​​against credit growth in large industries of 0.5%. It takes away more than 43% of incremental credit growth and, with NBFC, it takes 58%. This undoubtedly responds to the aspirations of a larger part of the population to own a car, a house, a television, a refrigerator and other durable consumer goods.

This growth also boosted consumption-led growth. But whether consumption fueled by household debt is sustainable over the long term is debatable. Whether personal loans replace employment and earn a living wage is another debatable question.

It is debatable whether consumption fueled by household debt is sustainable in the long term; Whether personal loans replace employment and the means to earn a living wage is also debatable.

Risk-adjusted returns are higher for lenders than for other sectors. It seems like a win-win situation for personal loan borrowers, the consumer-driven economy, and lenders. But this enthusiasm should be ignored if we are to believe the experience of other countries.

MSMEs: manufacturing and services: Rs 17.1 lakh crore

This segment also grew by 13.5% on the back of nearly 20% growth the previous year. This comes further on the back of Mudra Loans a few years ago. The government’s Emergency Credit Line Guarantee Scheme (ECLGS) guaranteeing 20% ​​of the loan has given a boost to credit growth. This has given a lifeline to micro and small businesses, which account for more than 80% of credit. This segment is very vulnerable to the vagaries of economic cycles and technological disruptions and has few buffers.

Despite these measures, mortality remains high. Very few of them are graduates from the medium sector and even fewer from the medium to large industry sector. As the collateral is limited to 20%, one would assume that the lenders did not compromise due diligence.


Credit to the agricultural sector increased by 9.6%. There is a need and an opportunity for massive investments in logistics to ensure better incomes for farmers, especially small and marginal farmers. Lenders must focus on faster adoption of agricultural technologies to improve productivity and efficiency and reduce risk along the value chain.

Infrastructure: Rs 11.90 lakh crore

Lenders in this sector have been badly bruised over the past decade. The loss given default in some cases is very high at over 90%. But this sector is vital for achieving higher economic growth as it has the highest growth multiplier of any sector. Bank credit picked up and recorded a growth rate of 11.2%. The problems are largely not lack of credit flow, but other administrative and political bottlenecks.

The central government recently launched the Gati Shakti mission to reduce delays, cost and time overruns. It has already identified 130 critical projects with significant shortcomings. The new development finance institution could do the heavy lifting. Small and medium class lenders might like to know why even the large university-led lenders could not identify and mitigate the risks associated with lending to this sector and instead turned effectively to the retail sector. retail/personal. Developments in this sector have huge implications for achieving the $5 trillion economy.

Big industry: stagnant at Rs 25 lakh crore: scissor problem

Credit flows to major industry have been sluggish in recent years and this trend has also continued this year. It rose by a meager 0.8%. According to the recent economic study, the share of industry in the growth of gross value added (GVA) fell from 9.6% in 2016 to a negative figure of 1.2% in 2021. Similarly, the growth of the manufacturing sector fell from 13.1% to minus 2.4%.

Given that large loans accounted for up to 70% of NPAs, it is natural for risk appetite to decline, which in turn limits supply

Large private sector lenders that suffered huge losses over the previous decade have turned to the retail sector. The massive radiation from previous years has decreased during this year. Some of the highly rated companies access debt markets directly and banks invest in some of these issues. Some of the companies also deleveraged taking advantage of the boom in capital markets. Even taking these factors into account, there is not much eagerness to lend to this sector.

This sector faces both demand and supply issues and many call this the scissor problem. First, the demand for funds for new investments is moderate due to the availability of installed capacity. Capacity utilization hovers around 70%. Second, the fact that some of the best-rated companies can borrow at repo or below-average rates (4%) indicates weak demand for new investment loans. It also reflects intense competition among banks for large loans and even to lend with a negative net interest margin (NIM).

Given that large loans were up to 70% of NPAs and some banks have taken NPAs of up to more than 15-20%, it is natural that risk appetite will decrease, which limits the offer. The importance of bank credit flows for big industry, especially for new investments, is undeniable. The recently announced Production Linked Incentives (PLI) program could stimulate demand for new investment credits.

Real Growth Engines and Fuel

From a broader perspective, the economy is driven by three engines: namely exports, investment and consumption. Bank credit, it may be said, fuels these engines of growth at an affordable cost and with the requisite prudence. Altitude and growth trajectory are very dependent on the efficiency of the pilots flying these engines. If they fly low and slow, much of the fuel (bank credit) is wasted and even becomes poisonous (NPA).

Government, entrepreneurs and consumers drive these engines. These engines of growth have been extinguished for a few years for various reasons. Nevertheless, the link between credit and economic growth should not be underestimated in a bank-dominated economy like ours. Bank credit is both a consequence and a cause of economic growth. Fiscal and monetary policies keep them in a virtuous circle.

Altitude and growth trajectory are very dependent on the efficiency of the pilots flying these engines. If they fly low and slow, much of the fuel (bank credit) is wasted and even becomes poisonous (NPA)

An IMF working paper (11/278) authored by DenizIgan and others argues that credit booms are followed by credit crises with a lag and sometimes threaten financial stability. The research covers 90 credit booms in over 90 countries including India. What is a credit boom? Where to find a balance? The macro level credit boom is a call to regulators and the micro level boom is a call to boards and shareholders? The RBI in its latest report puts this optimal credit growth at 13%.

After significantly cleaning up bank balance sheets, it is vital that a new ecosystem is created to facilitate higher credit growth and at the same time keep gross NPAs (non-performing assets) low, say 2%. Regulators, government, entrepreneurs, market infrastructure players have their tasks cut out.

Is the new playbook ready?

(The author is a former president of the PSU bank)

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