RBI released the data for sectoral credit for banking as of May 2017, a few days back. Our endeavor is not only to share some of the key insights from the data released but also connect the dots after connecting the same with other economic parameters. Overall it reflects significant headwind for our economy with gross credit deployment showing slower growth & even contraction in a few areas compared to previous year.
While Industry gross credit offtake contracted by 2.1% (compared to marginal expansion by 0.9% last year), Services grew by 4% only (compared by 9% growth last year). The most telling part of the data is around Personal loan which grew only by mere 4% compared to 11.7% last year. Lower retail credit offtake reflects poor consumer confidence in economy and signals challenging days ahead for the overall economic growth!
The personal loan story remarkably tells a telling tale if we juxtapose the same with the inflation based on CPI (Consumer Price Index) and the Current Situation Index from RBI Consumer confidence survey.
What we observe?
- A nearly 6% dip in personal loan growth primarily fueled by:
- A similar 6% dip in housing credit growth (51.3% of overall Personal Loan)
- Consumer Durable loans contracted by nearly 8% compared to nearly 18% growth last year (1.3% of personal loan)
- Vehicle loans also grew 7% less compared to FY16 (10.5% of personal loan)
- Advances against FD (4.1% of personal loan) contracted by 8.3%
- Consumer confidence in economy took a hit post demonetization, falling from 108.7 in Nov-16 to 102 in Dec and 98.7 in Mar-17
- CPI (price index) dipped just after demonetization to 3.17% before it picked up by Mar-17 to 3.89% (close to Gov target of < 4%) only to dip back to 2.18% by May-17.
Going by the classical Phillips curve framework which depicts the inverse relationship between unemployment & rate of inflation, the employment will then follow the path of inflation signifying that the current employment growth rate should also be low (which by the way is true if one goes by the quarterly data released by labor department).
So, we are seeing a situation where consumer confidence has taken a hit, employment generation is low and the retail credit offtake is also low. This isn’t the right story for a performing economy. Surely, RBI will be lowering the rates in its next monetary policy (unless GST fuels inflation) to encourage growth (lower rates expected to increase credit off take which then is expected to fuel economic growth)
Let us now focus on the largest 2 heads – Industry & Services.
- Industry segment saw a contraction of (2.1%) compared to a marginal growth of 0.9% last year.
- Large Industries, which contributes 82% to the total Industry credit, contracted by 2.1% which was the primary reason for the overall negative growth rate
- Services grew only by 4.0% which is more than 5% lower than last year growth figure
- Service sectors which provides large employment e.g. IT/ Computer Software saw a contraction of 8.7% in bank credit compared to a 6% growth last year
The points 1-4 paints a single story! The significant sectors both within Industry & the Services has shown decline in credit o/s growth implying that all is not well. Lack of expansion in these sectors will get reflected in lower employment generation & lower output and hence lower economic growth. This is exactly what is being feared in many quarters!
Now if we mix the distressing factors impacting the consumer part of the story, the gloom in the Industry impacting the expansion & employment and the stress in the capital of the banks impairing their ability to lend large, we are looking at a deadly cocktail! That does not make us pessimistic but what we are observing here are signals of overall economic stress which will need some heavy lifting to put the ‘life back into the economy!’. Hence we are staring at few immediate steps:
- Lowering of the rates by RBI to pump more money into the system in terms of loans
- Large Infrastructure investment by Government to boost the economy (large expenditure will lead to employment generation as well!)
- Good monsoon which should be a boon to agriculture and the allied industry
- Disinvestment of shares by Gov in public enterprises/ industries to shore up Gov finances to address fiscal challenges & finance infrastructure spend
- Expecting FDI to pick up post GST
- What more? Let’s keep adding as we see!
Folks who are completely glued to the rising Sensex though can mistake us as a moron!
RBI sectoral credit report May-2017
RBI Consumer Confidence Survey: https://www.rbi.org.in/scripts/QuarterlyPublications.aspx?head=Consumer%20Confidence%20Survey
RBI Database on Indian economy: https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home