Vijay Kumar Gaba

The latest credit and deposit statistics highlight some noteworthy trends in the Indian economy. During the first fortnight of June 2023, the credit offtake continued to grow at a healthy pace of 15.4% (yoy); though it slowed down on sequential basis. The deposit growth accelerated to 12.1% (yoy) narrowing the gap between credit-deposit growth to 337bps, the lowest in over a year. The gap recorded a high of 875bps in November 2022. Rise in deposit rates and withdrawal of Rs2000 denomination currency notes primarily led to the rise in deposits.

Credit deposit ratio at pre pandemic levels

The Credit to Deposit ratio has been generally improving since the later part of FY22 due to faster growth in credit compared to deposits. On a sequential basis in June 2023, it improved by 60 bps from the immediate fortnight (reported June 2, 2023, due to lower deposit growth than credit growth. The CD ratio is now closer to the pre-pandemic level of 75.8% in Feb 2020 and 75.7% in March 2020.

Liquidity tightening again

The liquidity in the banking system had shown significant improvement in the month of May due to deposits of Rs2000 currency notes and higher government expenditure, However, as per the latest statistics, the system liquidity had reduced to Rs0.83trn on 16 June 2023, as compared to Rs2.4trn on 02 June 2023. The weighted average call rate (WACR) was thus higher at 6.1% in the fortnight ended 16 June 2023, as compared to 4.5% in the comparable period in the previous year.

Personal and rural credit driving credit growth

The bank credit growth in recent months has been largely driven by personal loans, credit to NBFCs (largely consumer focused) and rural credit. A large part of incremental credit therefore could be unsecured.

In the month of May2023 about 42% of total outstanding bank credit was deployed in personal loans including credit card outstanding, and rural (non-food) loans. Personal loans (up 19.2%) were the fastest growing category in May 2023 (vs May 2022 as well as May 21). Credit card outstanding grew at over 30% (yoy) in May 2023.

Within personal loans unsecured loans grew 24% in May 2023, the fastest for any category. Food credit has been degrowing for almost two years, and now accounts for less than 0.25% of the total outstanding bank credit.

Housing loans (share of 47.3% within personal loans) grew by 14.6% y-o-y in May 2023 compared to 13.6% a year ago. Despite reporting healthy growth, the share of housing loans reduced to 47.3% in the personal loans segment as of May 19, 2023, vs. 49.2% over a year ago as unsecured loans grew at a faster pace.

Loans against gold jewellery also witnessed a strong growth of 22.1% y-o-y vs. a drop of 2.2% in May 2022 due to a sharp increase in gold prices in May 2023 vs May 2022. As the price of gold rises, it gives borrowers an additional opportunity to get more credit from the banks with the same quantity of gold.

Credit to NBFCs growing as faster pace

Lending to NBFCs grew by 27.6% y-o-y in May 2023. It continued to be driven by healthy growth reported by NBFCs for their loan disbursement and a shift of borrowings to the banking system. The Mutual Fund (MF) debt exposure to NBFCs also rose by 15.7% (yoy). The total bank lending to NBFCs has almost grown 3x in the past five years. The sharp rise in the popularity of equity funds in the past 5yrs has resulted in slower growth in the debt fund AUM of mutual funds; leading to the rise in reliance of NBFCs on bank credit. Besides, the international borrowings of NBFCs have also registered material decline in the post pandemic period.

Robust growth in credit to service sector

Service sector credit grew at a robust 21.4% in May 2023. Lending to NBFCs (27.6%) and Trade (17.5%) were the notable contributors in the service sector credit growth.  

Industrial credit growing at slower pace

The credit outstanding of the industry segment registered a moderation in growth at 6.0% y-oy in May 2023 from 8.8% in the year-ago period. The outstanding credit to industry accounted for ~24% of the total non-food outstanding. The credit to large industries grew just 3.9% (yoy), while MSME credit grew 12.3%.

The credit to infrastructure segment rose by 1.8% vs. 9.8% over a year ago period due to a slower growth witnessed by the power and road, also a drop in telecommunication and port segments. Overall, slow growth in infrastructure impacted the industry growth. The power segment, which accounts for over half of the infrastructure sector credit, witnesses a marginal growth of 0.3% in May 2023 vs. 9.3% in May 2022.

Asset quality improves NPAs fall to historic lows

Net Non-Performing Assets (NNPAs) of SCBs reduced by 34.0% (yoy) to Rs.1.3trne as of March 31, 2023. The NNPA ratio of SCBs reduced to 0.95% from 1.72% in Q4FY22 which is significantly better than the 2.1% level of FY14.

The GNPA ratio of SCBs reduced to 3.96% as of March 31, 2023, from 6.04% a year ago, and 7.58% as of March 31, 2021.

Accordingly, the provision coverage ratio of scheduled commercial banks (SCBs) improved to 76.3% at the end of March 2023.

For 4QFY23, the credit cost of SCBs stood at 0.58% sharply lower as compared to 1.44% seen in 4QFY21.

(Inputs taken from reports of RBI, SBI, and CARE Ratings. All rights duly acknowledged.)

Chart for the day

 It’s almost a week since the union budget for FY24 was presented in the parliament. The budget documents have been analysed by a variety of experts. Most of these experts have focused their opinion on the budget as per their professional affiliations and/or ideological orientation.

If I may sum up the consensus opinions, it would be as follows:

·         Development economists have criticized the budget for inadequate allocation to the social sector, especially education, health, rural welfare, MNREGA etc.

·         Market economists and strategists have commended the budget for higher allocation towards capital expenditure and commitment to fiscal discipline despite political expediency.

·         Accounting and tax professionals have spoken about the changes proposed in the tax laws to ease compliance and plug tax evasion loopholes.

·         The changes in personal taxation have not evoked much discussion or debate, given the tiny size of taxpayer that would be impacted by the changes.

From the investors’ viewpoint, however, there are some budget proposals that may potentially have deeper and wider impact than what would appear prima facie. Investors therefore need to examine these proposals in some more detail. I would for example like to, inter alia, analyse the following in some more detail:

Impact on working capital

The budget proposes to force businesses to make prompt payments to MSME. It is proposed that if a business fails to make payments to MSME vendors within the time specified in the MSMED Act (45 days or less), the expense in respect of such payment will be allowed only on actual payment basis, and not on accrual basis.

It would be worth examining Automobile OEMs, FMCG companies, textile companies etc. who have major sourcing from MSME vendors. This provision could have a material impact on their working capital financing requirement; as the credit period of MSME dues reduces to less than 45 days.

Insurers’ demand for gilt

Life insurance companies are one of the major buyers of government securities. The budget proposes to withdraw tax concessions in respect of insurance policies where the annual premium is in excess of rupees five lacs per annum per insured person. The instant market reaction to this proposal has been quite negative for life insurance companies.

If the market reaction was valid and life insurance companies are most likely to see a sharp fall in new insurance premium; it would be worthwhile to examine the impact of lower incremental insurance companies’ demand for government securities. Given (i) most banks are facing deterioration in the credit to deposit ratio due to faster rising credit demand; and (ii) the changes in rules of TDS on interest for the foreign portfolio investors are likely to further adversely impact the foreign demand for the Indian gilt; lower insurance demand could pressurize the bond yield higher.

Investors need to analyse this factor carefully to find out if any changes in asset allocation are required.

Savings vs Tax savings

In the past couple of years, the finance minister has given clear indications that the government wants to move towards a new tax regime with minimum tax exemptions and deductions. The latest budget reaffirms this stance.

Savings linked to tax saving schemes has been particularly popular amongst the salaried tax payers. It would not be exaggeration to say that a section of tax payers has been forced to curb consumption and save. Most of these savings have been in savings schemes like EPF, PPF, NPS or life insurance. Lately, contribution to equity linked savings schemes has also attracted greater interest. Besides savings, tax concessions have encouraged investment in residential properties also.

The genesis of tax concession to encourage savings lies in the socialist regimes of yesteryears where (i) focus of governments was on curbing consumption; (ii) fiscal deficit financing was only from the domestic sources; and (iii) social security was negligible for non-government employees. The governments offered higher rates of interest and favourable tax treatment even on interest to encourage savings. This has put the banking system at relative disadvantage and prevented rates from falling materially in good times.

Most of these conditions are now changing fast. There is no need to curb consumption. Foreign borrowing is permitted for fiscal deficit financing. Changes in pension rules for government and PSE employees and introduction of a variety of social security schemes have changed the needs of savers of various categories of investors.

It is therefore appropriate that interest rate regimes are made more market oriented; and saver are encouraged to explore more attractive investment options.

An anomaly however is over reliance of the government on the small saving schemes for deficit financing. Over 40% of the deficit is now financed through high cost small savings. Considering the fiscal constraints of the central and state government, small saving schemes run the risk of turning into a Ponzi scheme where the old obligations could be discharged only from the fresh inflows. If we build even 2% probability of new flows being insufficient to fulfil redemption/maturity demand, we could have a disaster of epic proportions.

Game of Tom and Jerry continues

It has been a consistent endeavour of every finance minister in the past couple of decades to plug the loopholes that were being used for tax avoidance by the wealthy taxpayers. However, the tax experts and money managers have been able to find alternative methods. Thus, the game of Tom and Jerry continues between the tax authorities and taxpayers.

Staying with the tradition, the finance minister has sought to plug some more avenues that were frequently used by taxpayers to lower their tax liability. Rationalization of tax on income from market linked debentures (MLDs); large insurance policies; reinvestment of long term capital in buying house property, meaningful TCS on foreign travel and investments; etc. are some major proposals in the latest budget to curb tax avoidance.

Investors may note that with every budget the avenues for tax avoidance are narrowing. Thus, it is pertinent that they avoid “tax avoidance” as one of the investment objectives. The chances of them ending up more tax in their endeavour to save taxes are rising with each budget.

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.