GDP uptick set to fuel credit demand

Mumbai: The Indian economy appears to be in the takeoff stage post the opening of the economy after the second lockdown in April with several elements falling in place.

So far this year, the growth in the major banking indicators has been mixed. Growth in deposits has slowed down while that in credit, is almost flat after witnessing a dip of one per cent last year as of September 24 over March, says a report by Care Rating.

With the economy picking up further in the second half, it may be expected that there will be higher demand for credit and overall growth of around 8-10 per cent for the year may be expected. Interestingly, the growth in credit has been a multiple of 1.9 times that of real GDP growth in the last ten years excluding FY21. The multiple has been unitary when juxtaposed with nominal GDP growth rate, it says.

However, for FY22 with real GDP growth to be around 9 per cent and nominal at 14 per cent, the study does not see these multiples to hold due to the unusual conditions which are dominated by base effects.

In case of bank deposits, the relation between economic growth and deposits has gotten diluted over time as factors such as interest rates, alternative savings instruments as well as investment opportunities have tended to influence the decision. As deposits also include wholesale deposits, there is a tendency for such deposits to increase towards the end of the financial year as companies park their surpluses with banks. Otherwise, there should be an even share of deposits through the two halves of the year, the report says.

Talking to Bizz Buzz, AK Dutt, former executive director of Dena Bank (which has now been merged with Bank of Baroda), says, "taking into consideration the last year's credit growth at 6 per cent as a base, we may see it happening in double digit for the current fiscal. The reason is not far to seek. Even though there is not much activity in the corporate sector, they may start using the installed capacity, which had remained unutilized so far, now and it may include their working capital too."

Commenting on deposit growth, he said that it is true that there is a flight of a part of retail deposit towards ever booming stock market and mutual funds, still banks have seen 40 per cent growth in their CASA deposit and it may drive the deposit growth.

The analysis here looks at what have been the trends in contribution of the second half of the year to incremental credit and deposits. It may be recollected that the first half of the year ending September used to be called the slack season while the harvest/festival season which started in October used to be termed as the busy season.

The latter was associated with a higher demand for credit as industry as well as retail had higher claims for credit. This is also the post monsoon time when infrastructure activity would tend to pick up.

Construction too would accelerate to also meet the festival demand for housing. The second half of the year has accounted for around 60 per cent of incremental deposits over the last 9 years, with the first 5 years registering an average of 54 per cent and the last 4 years 66 per cent. This change can be attributed more to the higher savings emanating from the rural sector which has tended to get channeled into bank deposits during this period.

This year, based on the signals being provided by several consumer goods companies, demand is expected to pick up which in turn should mean that savings would tend to be affected. The stock market boom as well as the preference for mutual funds would further direct households away from bank deposits. It may be expected that the growth in deposits in the second half should be subdued as households spend more of their income.

For incremental credit the second half averages 79.2 per cent of total indicating that demand picks up sharply during this period. There has however been variation here with the last two years registering over 100 per cent. Excluding these two years, the average is around 71 per cent.

Therefore, it can be concluded that for banks the second half is more important for credit growth relative to deposits, even while more than half emanates during this period. How does sectoral credit stack up? Within non-food credit the shares of the 4 broad sectors for the period FY13 to FY19 has been averaged. FY20 and FY21 have been excluded due to extreme numbers being witnessed. The picture is quite interesting.

Retail credit by far has a smoother pattern even though 61.5 per cent accrues in the second half of the year. This can be attributed to both mortgages and auto loans being reckoned during the festival time when sales also tend to peak. Add to this the marriage season which tends to increase the personal loans component within retail loans. The share is higher for agriculture at 72 per cent which can be linked to higher offtake post-harvest time when the sowing for the next season also begins. Some crops have their season also starting from October which adds to demand for credit, the report says.

Services are more dependent on the second half for credit which can be associated with higher offtake from finance companies and trade in particular. In case of industry a share of just over 100 per cent implies that there does tend to be a decline in credit during the first half which gradually gets reversed in the second.

Growth in credit to manufacturing has been negative at 4.3 per cent for the first 5 months and while bank hesitancy is one factor at play, demand too has been low. This can be seen from the investment profile of new projects announced as per CMIE for various quarters.