Bank credit set for double-digit growth

India’s total banking credit went up almost 17-fold from mere Rs 4.36 lakh crore in FY2000 to over Rs 73.50 lakh crore at present. Major contributors to this phenomenal growth were the telecom, construction and real estate sectors. During the period FY05 to FY08, the total banking credit grew at an annual average rate of 30% to touch Rs 23.62 lakh crore in FY08. During the same period, telecom, construction and infrastructure sectors maintained average annual rates of 50%, 47% and 41% in their respective credit growths. Massive capacity expansions in the power sector and mobile telecom partly helped the banks to grow their lending exponentially in the last 16 years.

However, unfortunately the banking credit which used to grow in strong double digit ranging from 17% to 37% on an annual basis, started deteriorating almost consistently since FY13, when its annual growth slipped down to 14.1% from 17% in FY12.  In FY16, it fell down to 10.9% and for the latest fortnight ending November 11, 2016, it fell down further to about two-decade low of 7.9%! While earning capabilities and hence, repayment problems in the infra sector have affected the growth of credit to that sector, the penetration of mobile telecom in India has peaked out. For instance the telecom subscriber base shrank by over half a percent to 1,053.4 million in August from 1,058 million in July 2016.

India needs a new demand theme to push banking credit growth. But such new themes (like telecom, construction and infrastructure in the past) are not visible right now. However, demonetization has given us some optimism on the revival of banking credit growth in the future. The whole economy is set for lower interest regime as the deposits with the banks are soaring and the interest rates on deposits have already started falling significantly.  Excessive supply of deposits with the banks would ultimately lead to significantly lower lending rates.

India’s currency in the system is estimated to be the highest among the BRICS (Brazil, Russia, India, China and South Africa) at over 10% of GDP as against 2.5% to 3% for South Africa and Brazil, and around 9% for China and Russia.  Expected fall in the black money in the system and also forced larger reliance on banking facilities would also help the banks in terms of significantly higher share of deposits in the total household savings in relation to share of currencies. Thus, supply push theme, along with the lower interest cost regime, are likely to enable the banking industry to come back to double digit growth in deposits once again within a year or two.  

The writer is founder and managing director, Equinomics Research & Advisory Pvt Ltd