This post has been authored by Somnath Ingole, Economic Analyst Intern at Arthashatra Intelligence

Credit deployment is one important part of banks in today’s life. Bank credit is the amount made available by banks to the individual or businesses in the form loans. But! What makes bank credit so important? Well, it provides additional funds to businesses and households. Which credit helps in accelerating the economic development of the country.

In this story, we are going to analyse the trend and movement of credit deployment in gross bank credit and analyse the surplus and shortage of credit from 2008-09 to the present date.

So, let’s get started!

The gross bank credit deployment by scheduled commercial banks can be divided into two categories. One being food credit and another being non-food credit. Food credit is referred to loans provided to the Food Corporation of India and other state agencies for procurement of food grains whereas, Non-food credit contains loans provided to agriculture & allied activities, industry, services, and personal loans.

Breakdown of non-food credit

In the overall credit deployment by banks, the share of non-food credit has always been huge. It has increased to 99.44% from 98.43%, within 10 years.

Having said that, looking at the non-food credit deployment by banks from 2008 to 2020 we observed that non-food credit by commercial banks has the highest share in the overall credit deployment.

However, Credit for agriculture & allied activities has been increasing year on year but at a slower pace. It was 2.75 lakh Cr. in 2009, which has increased to 12.99 lakh Cr. in March 2021. For industry, credit deployment was 8.58 lakh Cr. in 2009. Which increased to 29.18 lakh Cr. in 2021. And there has been a decrease in bank credit for the industry between the period 2016-2018. Which is counted as the period of demonetization and introduction of goods and service tax, and had a major impact on credit deployment.

We can see that industrial credit was stagnant n the pandemic period. Among the industry sector, bank credit flow towards medium-sized industries had reduced to 3.63% from 10.11% and for large-size industries, bank credit has increased to 83.22% from 74.15% between FY10 to FY20. And infrastructure is the only sector that has absorbed maximum credit of 36.28% from 28.98% followed by the metal industry of 12% in the whole decade. A significant fall was noticed in the credit of textile and petroleum industries under the industry sector over the years. It has reached 6.62% and 2.61% from 9.36% and 5.9% respectively. Despite the large share of non-food credit in overall credit deployment share of Industry (MSME’) was reduced to 31.54% from 43.14% in the overall period of FY10 to FY20.

For the service sector, it was 8.58 lakh cr. in 2008 which increased to 26.30 lakh cr. in 2021. And for personal loans it has increased from 5.21 lakh cr. to 28.13 lakh cr. from 2008 to 2021. In the last 10 years, the Personal loans and Services sectors credit disbursement increased significantly to 15.87% and 13.57% respectively. Bank credit for the service sector had decreased in all segments except for the NBFC’s. Credit for NBFC’s witnessed growth of 21.7% between FY10 to FY20.

Credit flow for the Personal loan sector has been always maximum when compared with the housing sector, credit card, and vehicle loans during 2010-2021.With CAGR of 16.1%, 18.3% and 13.2% respectively.

With the outburst of an unprecedented pandemic, the bank credits were highly impacted. RBI’s recent data on sectoral bank credit deployment by scheduled commercial banks shows that about 90% of the credit goes to the non-food sector.

The following graph shows the non-food credit deployment in percentage variation of sector specifically beginning of pandemic and after the pandemic.

Credit to agriculture and allied activities have performed well, registering 10.3% growth, 2021 compared to 5.2% in May 2020.

Growth in the credit to industry sector has decreased from 1.8% in May 2020 to 0.8% in May 2021. There is variation in the industry sector, like credit growth in mining & quarrying, food processing, textile, infrastructure has increased but for beverages & tobacco, petroleum and coal products, cement products, construction has decreased.

Looking at the progress of bank credit to the service sector shows it has decreed from 10.3% to 1.9% in the period of last one year. The major reason for the growth decline was the reduction in the credit to NBFC’s, transport operators, and commercial real estate. Bank credit for personal loans has registered 12.4% growth from 10.6% this year.

Conclusion

India’s banking and finance sector has bared the direct impact of fluctuations in the economy. During the pandemic, the environment for bank credit of SCB’s remained low due to risk aversion and subdued loan demand. Some other reasons for sluggishness in the credit of some sectors like industry, service sector are muted economic growth, lower working capital requirements. In the pandemic period, slippage in credit occurred because banks considered the fresh accounts will go under the NPA bracket.

The second wave dampened the prospect of economic recovery and still, it is not clear that when normalcy will come in the economy if it does. Amidst this situation, RBI and the government have tried to keep the stability and good health of the banking sector in the period of the pandemic through a moratorium on loan repayments, credit guarantee schemes, use of conventional and unconventional monetary tools. The impact of all measures has shown positive signs. These measures protected from the sharp rise in NPA’s also bank credit has improved in some sectors. Also, the government has announced 70% fiscal stimulus through the banking sector.

India is often considered an investment-led economy and sustained investment credit is necessary. This year will show an increment in credit flow to various sectors as RBI’s recent data on bank credit deployment proves that.

References:

• RBI (June, 2021), “Sectoral deployment of bank credit – May, 2021.
• LSI Research, “Sectoral deployment of bank credit in India.
• Harsh Vardhan (June, 2021), “A decade of credit collapse in India. Ideas for India.
• Tripathi Abhishek (2020), “Study of sector wise deployment of banking credit in India. PalArch’s Journal of Archaeology of Egypt. 17(6), 1-14.