The landscape of bank credit in India has undergone substantial changes over the past decade. As of now, the composition is as follows:
In comparison, the composition of bank credit back in March 2013 was markedly different:
Over the last decade, there has been a significant shift from industry-focused lending to a more diversified approach that emphasizes services and retail loans. This change is indicative of shifting economic priorities and consumer behavior.
Agricultural loans have experienced modest growth, largely due to government-imposed yearly targets aimed at supporting this vital sector. However, the overall focus has largely transitioned away from traditional agricultural financing.
Many large corporates are now opting for bonds and external commercial borrowings as alternative funding sources, which further illustrates the shift in how businesses are financing their operations.
The outlook for credit growth in FY24 is estimated to fall within the range of 13–13.5%. This projection is bolstered by the significant shift in focus from traditional sectors.
Banks have increasingly directed their attention towards retail and services loans, encompassing housing, vehicle, and credit card loans. This shift is partly influenced by advancements in credit-scoring models that facilitate financing in these areas.
In addition, non-banking financial companies (NBFCs) and the trade sectors have engaged with bank loans, contributing to the growth within the services sector.
Despite the positive trends, the decline in credit to the industry raises concerns. Unlike manufacturing credit, lending to services does not result in capital formation. Furthermore, retail credit, with the exception of housing and vehicles, often fails to generate recurring revenues.
In times of economic downturn, the risk of bad loans in the services and unsecured portfolios could escalate, particularly as these loans are typically not backed by tangible assets. The past failures of NBFCs and microfinance companies serve as a cautionary tale in this context.
On a more optimistic note, the outlook remains positive due to ongoing economic expansion and a concerted push for retail credit, which is further supported by improving digitization in the financial sector. The personal loan segment is anticipated to perform better in FY24 compared to both industry and service segments.
The shift in the composition of bank credit signifies a transformation in economic focus. However, this evolution is accompanied by its own set of challenges and risks that must be carefully navigated.
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