Vijay Kumar Gaba

Household now largest borrowers

As per the latest data released by the Reserve Bank of India, the share of personal loans in total outstanding bank credit in India has grown to 27%. For the first time, the share of personal credit in the total bank credit is higher than the credit to the industry. In past 12 months, the share of personal credit has increased by 2%, from 25% in September 2020 to 27% in September 2021; whereas the share of industrial credit has declined by 1% from 27% to 26% over the same period. The share of credit to agriculture sector has remained mostly stagnant at around 12%.

The trend could be explained, inter alia, through the following three key factors:

(a)   Rising institutionalization of the personal credit due to accelerating financial inclusion and digitalization of financial transactions.

(b)   Decline in share of NBFCs in the personal credit, due to a variety of reasons.

(c)    Deleveraging of balance sheets by large corporate, due to better business conditions (primarily commodities), resolution of debt, slowdown in new capex, and better working capital management.

Personal loans growing at fastest pace

During the 12months period (September 2020 to September 2021) the personal loan category recorded the highest growth.

·         Personal loans grew 12.1% in this period, almost at twice the rate of growth in total bank credit. In the previous 12month period, the growth in personal credit was 9.2%.

·         The credit to industry grew at anemic 2.5%, though better than the previous period growth of 0.4%.

·         The growth in credit to service sector, which suffered most of the brunt of the Covid-19 pandemic induced lockdown, declined sharply to 0.8% from the 9.2% recorded in the previous period.

·         Agriculture sector credit growth remained healthy at 9.9%, as compared to 6.2% in the previous period.

Change in borrowing mix of households reflects the impact of pandemic

The change in personal loan mix during past 12months clearly indicates towards the impact of pandemic on the household finances. It highlights how the pandemic changed the circumstances, affordability and priorities of the Indian households.

Traditionally, Indian households borrowed to create assets (house, vehicle), build skills (education) or meet emergencies (medical loans). However, in past 12months vehicle, education and housing loans growth witnessed contraction.

The loans for consumer durable witnessed sharp growth. Anecdotal evidence suggests that communication devices (smartphone, laptops etc.) and household appliances may have topped the priorities of the locked up Indian households, as against borrowing for vehicles and higher education.

Institutionalization of farm credit

The total bank credit to the farm sector is about Rs16trln. Out of this, pre-harvest (only farmers) credit is Rs8trln, post-harvest is Rs5trln and agri infrastructure funding is Rs3trln.

Overall, agri credit industry is expected to grow at a CAGR of ~10+% over the next decade, as the government’s focus on materially raising the size of agri economy yields results.

In past two decades the structure of agriculture financing has witnessed remarkable changes. From mere 19% in FY01, the share of direct institutional credit to the agriculture has grown to 43% of the nominal agriculture GDP in FY21.

As per India DataHub study, “Over the past three decades, direct institutional credit (Commercial Banks and Cooperatives) to agriculture has increased more than fifty times – from Rs300bn in 1991 to Rs15,000bn as of 2021. The output from the agriculture sector has increased by less than half of this (23x) during this period. Thus, in both absolute and relative (to output) flow of institutional credit to agriculture has increased massively. Outstanding Institutional credit is now at over 40% of agriculture GDP, more than two times of what it was in the 1990s.”

FinTech gaining ground in credit market

In an industry, traditionally dominated by moneylenders, banks and cooperatives, the online lending applications (FinTech) are fast gaining ground.

As per “A review of India’s Credit Ecosystem”, a report published jointly by Experian Services India (P) Limited and Invest India –

“Fintechs have carved out their own market share by targeting customers who were earlier not eligible to borrow due to lack of credit history and lack of collateral. Improved credit evaluation processes and digitization has allowed new-age players to lend to this segment cost-effectively. This brought a whole new section of customers into the lending industry and this customer segment is far from being saturated as of now. Many financial technology companies and NBFCs have emerged solely to enable lending to the previously unbanked population, creating a niche in the industry.”

Fintechs embarked on their journey by focusing on onboarding ‘credit invisibles’ and the ‘sub-prime’ population, mostly younger generation by leveraging alternative data and advanced analytics. Customizing product portfolio as per customer’s needs and focus on small ticket size loans across the board (personal loans (PL), business loans (BL), consumer durable (CD) etc.) has proven to be game changers in driving their top line growth.”

 

 

The recent data on sectoral credit distribution and growth released by RBI discloses some noteworthy trends. These trends are interesting and worrisome at the same time. In particular, the investors may take cognizance of the following trends.

1.    Overall bank credit growth for the month of August 2020 was 6% (yoy). This is the slowest growth in bank credit recorded since October 2017. It is pertinent to note because this slowest rate of growth has happened despite a slew of special credit schemes, lending concessions, and rate cuts announced by the government and RBI since May 2020.

2.    In past 10 years, the services sector has been the top performer for the Indian economy. The share of service sector in GDP is over 55%. Unfortunately, this sector has been hit the hardest by the COVID-19 induced lockdown. The credit growth to this sector has seen the sharpest drop in August. The credit growth to the sector slowed to 8.6% (yoy). NBFCs and commercial Real Estate segments witnessed sharp fall, while the trade credit accelerated by 12.5%, the highest pace since March 2019. This trend shall reflect in the GDP growth for 2QFY21 as well.

3.    In past 3 years, personal loan segment has been one of the key drivers of overall bank credit growth. In post lockdown period this segment has seen consistent decline in credit growth. In August 2020, the growth in this segment declined to 10.6% yoy. The credit card segment has seen the sharpest slowdown in growth during lock down. Whereas the vehicle loan segment saw some acceleration in August 2020 as compared to July 2020.

This trend prima facie sounds counterintuitive. In the period of lockdown and work from home, the use of credit card should have been higher. The record level of online shopping transactions reported by various ecommerce players also does not agree with this trend. The sharp slowdown in this segment could be indicative of (i) banks reducing limits of credit card users as the employment conditions worsened and household stress increased; or (ii) households sharply curtailing their discretionary spending.

The rise in vehicle loan in August with unlock gathering pace, may be indicative of rising preference for personal vehicles over public transport due to COVID-19 infection fears. Unavailability of public transport could also be a key factor. This trend would need to be watched carefully till the public transport become fully operational.

4.    As per HDFC Securities, “Industrial credit growth slowed to 0.5% YoY, from 0.8% YoY in July, led by a reduction in large industrial credit growth. Large industrial credit grew 0.6% YoY, vs. 1.4% in July, but de-grew sharply on a MoM basis (-2% in August, and -2.6% in July). After persistent de-growth, credit for medium industries grew 2.8% YoY. This segment saw strong MoM growth in July and August at 6.6% and 5.3% respectively- indicative of disbursals under the MSME credit guarantee scheme. Within industrial credit, sectors such as textiles, gems and jewellery, glass and glassware and all engineering including electronics saw persistent YoY de-growth. Credit for vehicle, vehicle parts and transport equipment and construction saw accelerating growth. Infra credit growth was flattish, with slowing trends in telecom credit growth.

On a MoM basis, industrial credit de-grew 1.5%, after de-growing 1.9% in July. Naturally, this was led by trends in large industrial credit, which constitutes 83.4% of total industrial credit. Credit to micro and small industries witnessed persistent de-growth at 1.2% YoY. Interestingly, credit to medium industries grew 2.8% YoY, after dipping 3.1% YoY in July. Further, on a MoM basis, credit to medium industries grew 5.3% MoM after growing 6.6% MoM in July. This appears to reflect disbursals under the MSME credit guarantee scheme.”

This trends may belie any claim of broader growth revival in near term.