Modi's demonetisation drive may stunted bank credit growth further

Looks like the Reserve Bank of India's (RBI) focus on lowering the interest rate in order to ensure an efficient transmission mechanism has failed to uplift banks' credit book. 

A Care Ratings reported stated, demand for credit has been low partly due to the economic environment as well as excess capacity in industry.

It said, "The recent demonetisation of old currency has created disturbances in economic activity with the services sector in particular being affected sharply. The same also holds for the SME segment in manufacturing which deals with currency for substantial quantum of transactions."

This fiscal (FY17), bank credit grew at a lower rate compared to last year. 

In the period of October – March 2016, gross bank credit saw growth of just 0.83% against 3.3% in the same period of the last year led by slowdown in the non-food credit – which accounts for 98.8% share of the portfolio. 

In October-March 2016 period, non-food credit grew by 1.2% versus 3.4% of last year. Under this - credit to agriculture was at 5.4% as against 7.5% last year.

Similar performance was seen from credit on personal loan segment. It stood at 8% compared to 10.2% of last year. Housing and education loans saw slowdown by 8.6% and 10.4% respectively.

On the other hand, growth of credit to manufacturing widened to -4.6% against -0.3% last year.

Service sector loan book increased by 2.8% against growth of 2.6%  in the last year. NBFCs have also been negative at -5.2% compared to positive 2.1% of last year.

Moreover,  bank credit growth is expected to be hampered following the latest data on GDP for Q2FY17.

Care Ratings said, “The latest GDP reveals that capital formation continues to decline to a new low of 27.1% as of September, which indicates that there would be less demand for  funding until such time that demand for other goods pick up significantly.”
 
It added, “GDP growth for FY17 would be affected negatively on account of these adjustments, which will also have a bearing on the demand for credit from industry in general. The entire array of personal loans barring credit cards would witness a decline in growth, while the NBFC, commercial real estate and trade components of services will also witness a similar effect.”