1. Column: A credit-less recovery?

Column: A credit-less recovery?

Continued deceleration in credit offtake raises questions about investment demand and overall recovery strength

By: | Updated: November 16, 2015 3:20 PM

About a year ago, we examined growth trends in bank credit in these columns to gauge the strength of economic activity (“Bank credit: A key leading indicator?”, The Financial Express, August 22, 2014, bit.ly/1kS4DL7). Noting the contrast in its decelerating drift and the ebullient markets, expectations and economic outlook, we argued demand was more subdued and economic conditions much weaker than believed. And if the predicted recovery path had to be realised, then the slowing bank credit growth had to sharply reverse as long-term, historical patterns would suggest. Here, we revisit those issues and take stock of the distance traversed since.

Before that, a quick refresher is useful. To recall, political change last year reinvigorated the economic environment.

The general interpretation was that a revival of business and consumer confidence would transform into actual growth via increased consumer spending, followed by a pick-up in private investments; an improved macroeconomic position, falling inflation, subsequent plunge in oil prices and higher capital spending by the government would provide further support. The frequent, common characterisation was of a ‘Goldilocks’ setting. GDP growth was widely projected to accelerate into the 5-6.5% region (old GDP series) in FY15 from 4.7% the preceding year. Quarterly output grew 5.7% in April-June 2014, buttressing the optimism.

graph-column-renu-kohli

Our interpretation from the falling and weak pace of bank credit growth was contrarian to this picture. This was countered by two major arguments: One, that bank credit growth was a lagged than a lead economic indicator; as a recovery took hold, credit demand or offtake would pick up with an interval. Two, costlier bank loans were being substituted by non-bank funds as observed from the strong growth of commercial paper and bond issues.

So, we revisit these arguments and interpret the signals from bank credit growth afresh. The accompanying chart plots the year-on-year growth in aggregate bank credit (non-food) with its three major constituents—industry, services and personal or retail loans; these broadly indicate respective investment and consumption demand in the economy. As can be seen from the chart, monthly credit growth has slipped further down in April-October 2015 compared to a year ago. On average, it is 3 percentage points lower so far with an average monthly growth of 9.4%.
The sub-trends under the surface are more remarkable. Aggregate growth in outstanding stock of bank credit is almost entirely propped up by personal loans as banks lend freely to the segment. Year-on-year retail credit has grown 16% on average each month so far (April-September 2015). It is reasonable to infer that consumption demand, reflected from bank borrowings for housing, consumer durables, vehicles, etc, and against shares & credit cards for other reasons, has risen fast and is quite robust so far.

By contrast, bank credit to industry is trending far lower relative to last year. After stripping out the price effects from lower funding requirements of fuel industries (petroleum, coal and nuclear), credit to industry grew in the 5-6% region (April-September 18, 2015) against last year’s monthly range of 8-12%. As bank credit is the major source for financing real activity in India’s bank-dominated financial system, a lift or otherwise in this variable is a fair descriptor of investment demand.

But since non-bank resources have also acquired importance, the chart adds commercial paper and corporate bonds subscribed by banks, along with non-food credit growth for a fuller perspective. Inclusive of the three elements, combined funding support from banks is barely 40 bps higher on a monthly average basis in April-October, as compared to bank credit growth alone (this has a 96% share).

Overall growth in commercial banks’ financing support to private sector is way lower than last year. Banks’ subscription to private corporate and public undertakings’ bonds have decelerated—3.5% on average each month in April-Oct 2015 as default risk rose; the corresponding growth in April-October 2014 was 29%. Growth in commercial papers, robust this year, is also statistically boosted by an extraordinary low base last year.

In summary, the inclusion of resources besides loans does not materially alter the picture of a further deceleration in resources mobilised via banks this year.

Excluded from the above data are funds mobilised from external resources and from equity issuances. Foreign appetite for corporate bonds has been receding this year, in line with a global retreat and aversion to corporate debt; they are mostly net sellers in the past few months. New equity issues totaled R126 billion in April-August 2015, against a corresponding R71 billion last year. External commercial borrowings (net) as per balance of payment flows were negative in April-June 2015 (-1.3 billion), no matter the strong rate of borrowing approved each month. Foreign direct investment (net), at an average $2.8 billion monthly in April-September 2015, is marginally higher than the corresponding $2.6 billion clocked on average each month last year.

Overall, it seems demand for funds, bank and non-bank, has considerably diminished so far this year. In fact, the profile of non-bank financial resources buttresses what bank credit trends were showing even earlier: An investment recovery has not really transpired, contrary to what was widely expected last year, and as bank credit growth signaled then. A year down the line, the lagging indicator tag of bank credit still awaits confirmation. Then, we were sceptical if R1.2 trillion worth of new investments, as mentioned in the RBI Annual Report, could be realised in FY15 as this seemed inconsistent with the behavior of bank credit. Subsequent developments show this variable quite fairly signaled a weaker economic impulse than suggested by the narrative of recovery to a higher growth path in the following quarters.

This year, it appears the credit-GDP multiplier is even weaker. Investment demand has not taken off. The expected boost from higher government spending on infrastructure investments has not so far materialised visibly enough. The growth question then narrows down to the strength and sustainability of consumer demand, i.e., its sole ability to drive a cyclical rebound. It is the endurance of private consumption that will largely determine the extent of decrease in the currently under-utilised capital and labour resources ahead. Global demand is, and likely to remain very feeble. The baton can shift to investment only after a significant reduction in this under-utilisation. If bank credit growth is an indicator, this is far from certain at the moment.

The author is a New Delhi-based macroeconomist

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