Declining bank credit indicates poor economic performance

Declining bank credit indicates poor economic performance


Apart from gross domestic product (GDP) and gross value added (GVA), another indicator which shows whether an economy is thriving or stagnating is the growth in bank credit. Credit is a critical input in the production of goods and services. It is generally the case that during prosperous times, economic actors, who are engaged in different sectors or in various industry, take up bank loans to invest.

The provisional data provided along with a press release from the Reserve Bank of India (RBI) dated 30 June, 2017 reveals that in the fortnight ended 26 May, 2017, the year-on-year gross bank credit grew by just 3.5 percent. However, in the fortnight ended 27 May, 2016, the year-on-year growth rate in gross bank credit was at a much higher level i.e. 8.0 percent. Please see chart-1.

Therefore, a falling growth in bank credit may imply that the Indian economy is not doing well in recent times.   

Chart 1 Growth in bank credit by major sectors in May 2016 & May 2017

Source: Deployment of gross bank credit by major sectors and major industries, dated 30 June, 2017, Reserve Bank of India, please click here to access the data
 
Interestingly, the Weekly Statistical Supplement - Extract (available at https://rbi.org.in/Scripts/BS_viewWssExtract.aspx) from the Reserve Bank of India shows that in the fortnight ended 26 May, 2017, the year-on-year aggregate deposits increased by 10.9 percent. In the fortnight ended 27 May, 2016, the year-on-year growth rate in aggregate deposits was 8.9 percent.

Based on the data provided by the Weekly Statistical Supplement – Extract, the Inclusive Media for Change team has calculated that the credit-to-deposit (CD) ratio of the banking system, or the proportion of deposits deployed as loans, fell from 75.83 percent in the fortnight ended 27 May, 2016 to 71.97 percent in the fortnight ended 26 May, 2017. The same source shows that the credit-to-deposit (CD) ratio of the banking system stood at 72.26 percent in the fortnight ended 23 June, 2017.

Bank credit to agriculture

The press release from the RBI dated 30 June, 2017, among other things, says the following:

* Credit to agriculture and allied activities increased by 7.4 percent in May 2017, lower than the increase of 15.6 percent in May 2016.

* Credit to industry contracted by 2.1 percent in May 2017 in contrast with an increase of 0.9 percent in May 2016.

* Credit to the services sector increased by 4.0 percent in May 2017, lower than the increase of 9.3 percent in May 2016.

* Personal loans increased by 13.7 percent in May 2017, lower than the increase of 19.1 percent in May 2016.

When the Inclusive Media for Change sifted through the provisional RBI data, it was observed that the year-on-year growth rate in priority sector lending fell from 11.7 percent in the fortnight ended 27 May, 2016 to 4.1 percent in the fortnight ended 26 May, 2017. Please see chart-1.    

It needs to be mentioned here that the gross bank credit has two components: food credit and non-food credit. As compared to food credit, the share of non-food credit in gross bank credit is significantly higher. For example, in the fortnight ended 26 May, 2017, the share of non-food credit in gross bank credit was 99.22 percent, while that of food credit was just 0.78 percent.

Credit to agriculture and allied activities, industry (micro & small, medium and large) and services along with personal loans add together to give total non-food credit.

Priority sector lending, however, is different from non-food credit, under which loans are distributed to various sectors like agriculture & allied activities, micro & small enterprises, manufacturing, services, housing, micro-credit, education loans, state-sponsored organisations for SC/ ST, weaker sections and export credit.  

While the growth rate in credit to agriculture and allied activities (under non-food credit) fell from 15.6 percent to 7.4 percent between May 2016 and May 2017, growth rate in credit to agriculture and allied activities (under priority sector lending) reduced from 15.6 percent to 7.2 percent during the same period.

The share of agriculture and allied activities in total non-food credit stood at 14.15 percent, whereas that of industry (micro & small, medium and large) remained at 38.2 percent in the fortnight ended 26 May, 2017. It shows that the credit flow to industrial sector is much higher as compared to the agrarian sector.

Economic growth

The provisional estimates from the Central Statistics Office (CSO), which was released on 31 May, 2017, indicate that despite an increase in cash deposits with the banks due to the note ban that was imposed between November and December last year, the growth rate in real Gross Value Added (GVA) at basic price pertaining to the 'financial, real estate & professional services' sector is likely to reduce from 10.8 percent to 5.7 percent between 2015-16 and 2016-17.

It is also estimated that in India the growth in real GVA at basic price (i.e. increase in GVA after neutralizing the effect of price inflation) will slow down from 7.9 percent to 6.6 percent between 2015-16 and 2016-17.

Table 1: Growth in GVA at basic price (at 2011-12 prices) during various quarters of 2015-16 & 2016-17 (percentage change over previous year)

Table 1 Real GVA growth in various quarters

Source: Press note on provisional estimates of annual national income 2016-17 and quarterly estimates of GDP for the fourth quarter (Q4) of 2016-17, Central Statistics Office, MoSPI, dated 31 May 2017, please click here to access

The growth rate in real GVA at basic price pertaining to the 'financial, real estate & professional services' sector, is expected to fall steadily over the four quarters of 2016-17 (i.e. from 9.4 percent in Q1 to 2.2 percent in Q4 of 2016-17). Please see table-1.

Some economists believe that slackening of demand for bank loans and growing portfolio of bad loans with the banks, among other things, could have caused slow growth of the banking and finance sector.
 
There are others, however, who say that credit growth has not remained subdued (since demonetisation) because Indian firms now rely on other sources of funds like foreign direct investment (FDI), commercial papers, external commercial borrowings (ECBs), equity, non-bank financial institutions etc.  

It must be noted that GVA is the difference between GDP and net indirect taxes. In order to know more about the concept of GVA, please click here.
 

References:

Sectoral deployment of bank credit - May 2017, dated 30 June, 2017, Reserve Bank of India, please click here to access

Deployment of gross bank credit by major sectors and major industries, dated 30 June, 2017, Reserve Bank of India, please click here to access the data
 
Press note on provisional estimates of annual national income 2016-17 and quarterly estimates of GDP for the fourth quarter (Q4) of 2016-17, Central Statistics Office, MoSPI, dated 31 May 2017, please click here to access

Bank credit grows at 6.02%, deposits at 11.19%: RBI data, PTI, Livemint.com, 21 June, 2017, please click here to read more
 
The decline and fall of bank credit -Aparna Iyer, Livemint.com, 24 March, 2017, please click here to access
 
Is Credit Growth Really That Low In India? No, Says Nomura -Ira Dugal, BloombergQuint.com, 3 March, 2017, please click here to access 
 
 
Image Courtesy: Inclusive Media for Change/ Shambhu Ghatak



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