Bank credit growth in India has remained anaemic for the past few years. Indeed, credit growth has been slower than nominal GDP growth in five out of the preceding seven years. This is a break from the past when credit growth has historically almost always been faster than nominal GDP growth. For example, in the preceding decade (FY05-15), Bank credit had grown at 22% Cagr while Nominal GDP had expanded by 15% Cagr. The standard metric to analyse why credit growth has been this anaemic is to splice the data across sectors – Agriculture, Industry, Services etc.
But a more interesting analysis is to splice data by the borrowing entity. And the short answer to why credit growth has been weak is that the corporate sector in India has refrained from borrowing even as other entities have continued to borrow. Consider this: In the last six years (FY15-21) bank loans to the non-financial corporates has grown by just 15% in absolute terms or 2.3% Cagr. In contrast bank loans to all other entities has more than doubled or by 12.4% Cagr. The net result of this is that overall bank credit has grown by 61% in absolute terms or by 8.3% Cagr.
Further, there is not a material difference between the public sector or the private corporate sector in terms of credit growth. Bank loans to Private non-financial corporates have grown by ~2% Cagr in the last 6 years while those to public sector non-financial corporates have grown by almost 4% Cagr. The divergence in credit growth has been starker in the last 3 years. Between FY18-21 bank loans to the non-financial corporate sector declined 1% while bank loans to all other entities have grown by 45%. Effectively, the non-financial corporate sector has not borrowed at all, in incremental terms, in the last 3 years.
So, the answer to the question as to when will credit growth accelerate is largely the corporate sector. Credit growth will accelerate meaningfully once the corporate sector starts to borrow. Non-Financial Corporates are already borrowing – credit to them has grown in double-digit terms in the last 3 years. And for the corporate sector to borrow, they need to get into the balance-sheet expansion phase – which could either be capex or M&A. In either case, they will need visibility on growth and profitability. The other headwind for credit growth is the current low cost of equity – both in the unlisted as well as listed space. This coupled with the scars of the previous credit boom. The bottom line is that the credit growth will likely lag recovery in the next upcycle.