Bank credit growth remains robust despite rate hike, shows RBI data

The Reserve Bank of India (RBI) on Monday released its data on sector-wise bank credit growth, which showed that credit offtake continued to remain robust across all sectors - farming, industry, services, and retail, despite increase in lending rates. The data showed that the bank credit was higher even than in pre-pandemic times (September 2019) on a year-on-year (YoY) basis, supported by higher non-food credit demand.

Total bank credit grew by 16.4% on YoY basis as of Sep’22, compared with 6.7% growth as of Sep’21 and 8.2% as of Sep’19 (pre-pandemic). On a YoY basis, non-food bank credit registered a growth of 16.9% in September 2022 as compared with 6.8% a year ago, as per the RBI data. Within this, the credit to services sector surged to 20% from 1.2% in September 2021, while the personal loans segment grew by 19.6% as against 13.2% in the same period last year.

As per the monthly report, credit growth to the services segment was driven by improved credit offtake to NBFCs and trade sectors, whereas acceleration in retail loans was largely aided by housing and vehicle loan segments.

During the month under review, credit to agriculture and allied activities rose 13.4%, while the industry sector reported a growth of 12.6% as compared with 1.7% in September 2021. “Size-wise, credit to large industry accelerated to 7.9% against a contraction of 2.1% a year ago. Medium industries recorded credit growth of 36.2% in September 2022 as compared with 37.1% last year, while credit to micro and small industries rose by 27.1% (13.1% a year ago),” the RBI report noted.

According to an analyst at Bank of Baroda, the latest data clearly predicts that RBI’s 190bps hike in rates has so far not dented the credit demand. In the ongoing fiscal so far, the central bank has raised the repo rate, the rate at which it loans money to banks, by a cumulative 1.9% – 40 basis points in an off-cycle meeting in May, 50 bps in June and 50 bps in August and 50 bps in September.

“While a low base can be a part of the reason credit growth seems solid this year in H1, the other key reasons return to pre-pandemic conditions and revival in demand. As our domestic demand is expected to remain fairly insulated from global growth slowdown, and with the onset of the festive season (October to December), we believe credit demand to remain steady in H2 as well,” Sonal Badhan, economist at Bank of Baroda, said in a note.

Badhan further said that downside risks can emerge from impact on export demand if major economies enter into a recession and consumption demand inflation continues to remain elevated.

“Going forward, we expect credit demand to remain steady even as RBI continues to hike rates. While the personal loan and services sector will be supported by pent-up consumption demand, credit to industry will be buoyed by an improvement in the investment climate,” Badhan added.

As per the Bank of Baroda report, total bank credit rose by 16.4% on a YoY basis as of Sep’22, whereas on a fiscal year-to-date basis (FYTD) basis, credit demand grew by 6.2% in H1FY23, from 0.1% in H1FY22 and H1FY20. During the financial year, a sharp increase was witnessed in the non-food credit demand with growth at 16.9% as of Sep’22 (YoY) versus 6.8% as of Sep’21 and 8.1% as of Sep’19. On the other hand, food credit, given to FCI and state agencies for procurement of food grains, has seen a considerable decline this year, the report highlighted.