India Economy

Look beyond bank credit numbers

Radhika Merwin | Updated on January 15, 2018 Published on March 19, 2017

Thanks to other funding avenues besides banks, the link between credit growth and economic activity is weakening

For a while now, industry and market players have been fretting over bank credit growth slipping to multi-year low levels of 5 per cent.

Given that bank credit has always been a powerful indicator of the economic activity within the country, such abysmal pace of lending activity has, no doubt, raised concerns.

But in recent years, the link between credit growth and the pace of economic growth has been gradually weakening. Credit growth, which grew at 2.5 to 3 times the real GDP growth in the past, is down to 1.2 to 1.4 times over the past two years.

The slackness has been mainly driven by public sector banks that constitute over 70 per cent of the loans within the banking system. A sharp increase in bad loans has reduced their appetite to lend. While private banks have been the obvious gainers, there are other segments too that have been bucking the trend.

The Indian bond market has been buzzing with new issuances, offering corporates — at least the higher rated ones — a good alternative source for raising cheaper money. Banks too, wary of lending directly to companies, have been active participants in the bond market, lapping up corporate bonds.

Non-banking finance companies (NBFCs), which have long served the needs of borrowers mostly ignored by traditional banks, have grown by leaps and bounds, now contributing a wider share of the total credit in the system.

Other pools of capital, such as mutual funds, have also been growing steadily over the past few years, indirectly serving the funding needs of corporates.

NBFCs’ success story

NBFCs have been carving out a great success story for themselves over the last couple of years, riding on their niche competencies, wider reach, and focussed product lines.

Consider this. Even as bank credit growth slipped from 17 per cent levels in the 2012 fiscal to 14 per cent in the following two years and further to 8-9 per cent levels in FY15 and FY16, loan growth (annual) for NBFCs has been rock steady in the 17-19 per cent range over this period.

According to the financial statistics data for NBFCs put out by the RBI, the asset base for NBFCs has grown by one-and-a-half times between 2012 and 2015 while net profit has doubled during this period.

According to a PWC report, NBFCs’ share of total credit has grown from 8 per cent in 2006 to about 14 per cent in 2015, and is expected to touch the 18-20 per cent mark by 2020. Anecdotal evidence of results declared by listed NBFC players continues to reflect this buoyant trend.

Micro-finance institutions (MFIs) in India, too, have been serving well the weaker sections of society in the remote hinterlands. According to the Micro Finance Institution (MFIN), the loan portfolio of NBFC-MFIs registered under RBI has more than doubled between FY13 and FY16. As of December 2016, the loan portfolio of MFIs stood at ₹56,634 crore, a growth of 53 per cent over last year.

Bonding well

In the past few years, as banks have been trying to consolidate their balance sheets, companies have been flocking to the bond market to raise money.

While there are still several weak links in the Indian corporate bond market — for one, a fairly narrow composition consisting mainly of higher rated bonds — the steady growth in bond issuances is heartening.

According to data from the Securities and Exchange Board of India (SEBI), private placement of corporate bonds has been rising over the few years, growing by over 20 per cent annually over the past three years.

In 2016-17 so far, bond issuances have touched the ₹5.5 lakh crore mark, a growth of 21 per cent over last year.

The net resources mobilised by mutual funds have also grown substantially over the past two years. The assets under management of the industry touched ₹17.9 lakh crore in February 2017, growing 41 per cent over the previous year. These private pools of capital help channelise household savings into productive uses.

It is true that each of these alternate funding sources still has a long way to go before ensuring the transition away from the bank-dominated system. Even so, their growing share in the overall credit to the economy can no longer be ignored.

Between March 2014 and March 2016, even as bank credit grew by 9 per cent annually, credit from the non-banking system, including loans of NBFCs, corporate bonds, commercial paper and external commercial borrowings — all put together — sported a 17 per cent growth. Are we missing the big picture by looking at bank credit alone?

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