Composition of Bank Credit in India

Composition of Bank Credit in India

Subject: Economy

Section: Monetary Policy

The composition of bank credit in India has shifted significantly over the years, with an increasing proportion of credit going to services and retail loans rather than the industry.

Here’s an overview of the changing composition of bank credit:

As of March 2023:

• Personal loans now constitute the largest component of bank credit, accounting for 32.1% of outstanding credit.
• Services follow closely, making up 28.4% of total bank credit.
• The industry accounts for 26.2% of credit.
• Agriculture receives 13.3% of the total bank credit.

A Decade Ago (March 2013):

• Industry was the dominant sector, receiving 46% of the total bank credit.
• Services comprised 24% of the credit.
• Retail loans made up 18% of the credit.
• Agriculture received 12% of the bank credit.

This shift in credit composition over the last decade can be attributed to several factors:

1. Retail Loan Push: Banks have actively promoted retail loans, including housing loans, vehicle loans, credit cards, and advances against fixed deposits. This shift is driven by consumer demand and banks’ efforts to diversify their lending portfolios.
2. NBFCs and Services: Non-Banking Financial Companies (NBFCs), including housing finance companies, and the trade sector (wholesale and retail) have increasingly relied on bank loans, leading to an increase in credit to the services sector.
3. Government Targets: The modest growth in loans to the agriculture sector may be influenced by the government’s yearly targets for credit growth in this segment.
4. Alternative Funding: Large corporations have sought alternative funding sources like bonds and external commercial borrowings, reducing their dependence on bank credit for industry-related financing.

However, this shift in the composition of bank credit raises concerns:

• Credit to the industry sector is declining, which can affect capital formation and recurring revenue generation, both essential for economic growth.
• The growth in retail and service sector credit does not necessarily lead to capital formation or recurring revenues, and it can pose challenges when bad loans surge.
• Banks may focus more on retail and service segments due to credit scoring models, simpler financing processes, and attractive interest margins.
• There is a risk that a downturn in the economy could lead to increased non-performing assets in services and unsecured credit portfolios, as these sectors lack tangible assets as collateral.

Despite these challenges, the outlook for bank credit remains positive for FY24, supported by economic expansion, digitization, and a continued push for retail credit. Credit growth is estimated to be around 13.0–13.5% for FY24, excluding the impact of the merger of HDFC with HDFC Bank. The personal loan segment is expected to perform well compared to the industry and service segments.

About Gross Fixed Capital Formation (GFCF)

Gross Fixed Capital Formation (GFCF) is a crucial economic concept that represents the total value of investments made in the production of physical assets within a country during a specific period. These investments primarily include tangible assets like buildings, machinery, equipment, infrastructure, and any other capital goods that contribute to increasing the nation’s capital stock and productive capacity.

The significance of GFCF lies in several key aspects:

1. Economic Growth: GFCF is a leading indicator of an economy’s development. Higher investments in capital assets lead to the expansion of a country’s productive capacity, allowing for increased output and economic growth.
2. Employment Generation: Many sectors are involved in the process of creating and installing physical assets, such as construction, manufacturing, and infrastructure development. This investment activity results in job creation and contributes to overall employment.
3. Technological Advancement: Investments in machinery and equipment often involve adopting more advanced and efficient technologies. This helps to improve productivity and makes businesses more competitive.
4. Infrastructure Development: A significant portion of GFCF is allocated to infrastructure projects like roads, bridges, ports, and utilities. These investments enhance a country’s connectivity and support various economic activities, leading to economic development.

In essence, GFCF reflects the commitment to the long-term development and growth of an economy, as it contributes to the expansion and modernization of its capital assets. A higher GFCF ratio is generally associated with faster economic growth, job creation, and overall prosperity.