What bank borrowing tells us about the pace of growth across key sectors

The lockdowns in the various phases of the Covid-19 pandemic badly hurt the Indian economy, though some sectors such as hospitality and aviation were hit harder than others. Now, the economy is recovering. Again, some sectors are recovering quickly while some others are still struggling. How do we compare growth across sectors?

One way to gauge the state of business activity in the country is to look at how bank credit is flowing to various industries. Indeed, the sectoral bank credit picture paints a picture of a pick-up in demand that had been hit badly by the lockdowns.

While credit flow showed signs of a revival earlier this year, it was partly due to the low base effect of the previous year when the second wave of the pandemic was at its peak. But data compiled by the Reserve Bank of India (RBI) shows that the momentum has not ebbed.

Even though industrial activity as captured by the index of industrial production decelerated last month as the impact of a favourable base effect faded, the data on sectoral deployment of bank credit for the month of July 2022 paints a pretty picture.

Data collected from 40 select scheduled commercial banks, accounting for about 93% of the total non-food credit deployed by all scheduled commercial banks, showed that non-food bank credit continued to expand, registering 15.1% growth as compared with 5.1% in June 2021.

Credit growth to agriculture and allied activities improved to 13.2% in July 2022 from 11.1% a year ago. But credit growth to industry accelerated to 10.5% from 0.4% in July 2021.

Size-wise, credit to large industry grew by 5.2% against a contraction of 3.8% a year ago. Medium industries recorded credit growth of 36.8% in July 2022 as compared with 59% last year, while credit growth to micro and small industries accelerated to 28.3% from 10.5% during the same period.

Meanwhile, credit growth to the services sector improved to 16.5% in July 2022 from 3.8% a year ago, mainly due to improved credit offtake to ‘NBFCs’ and ‘transport operators’. Credit growth in the personal loans sector was robust at 18.8% in July 2022 vis-a-vis 11.9% in July 2021 supported by ‘housing’ and ‘vehicle loans’ segments.

If we drill deeper and look at the sectoral deployment of bank credit for the month, we can use it as a proxy to gauge which sectors are doing better than others.

After all, lenders also do due diligence on growth prospects and repayment capacity of borrowers. Secondly, companies take debt to expand based on their own estimates of demand from their own customers.

Although one can also borrow to simply retire old debt, as was happening in the recent past when the policy rates and thereby lending rates at large had hit a bottom. But now, given the stage of the interest cycle where the rates have now started to move up, a good chunk of the debt is to finance expansion.

The winners

Within industry, credit growth to engineering, basic metal and metal products, cement and cement products, chemicals and chemical products, food processing, infrastructure, leather and leather products, mining and quarrying, rubber, plastic and their products, vehicles, vehicle parts and transport equipment, and wood and wood products accelerated in July 2022 as compared with the corresponding month of the previous year.

Diving deeper into the sub-sectors, we see credit offtake improving in iron and steel within the metals pack; drugs and pharmaceuticals rising within chemicals at large; and power and telecom within the infrastructure domain showing robust growth acceleration or turnaround.

If we look within the services space, transport operators, retail trade, housing finance and professional services have seen jumps in credit flow. Looking at the consumer finance space, consumer durables, housing, vehicle loans, advances against fixed deposits and advances to individuals against shares, bonds, etc. saw a rise.

In what shows robust consumer sentiment, credit card outstanding, too, grew strongly.

The laggards

On the flip side, credit growth to construction, gems and jewellery, glass and glassware, paper and paper products, textiles, beverages and tobacco, decelerated or even contracted.

Within the food processing domain, credit to edible oils and vanaspati has been almost flat. Bank credit to sugar has seen some improvement but still contracted 0.9% and is, therefore, yet to see a revival.

In the textiles business, credit flow has shrunk due to the man-made textiles category where credit growth rate has skid after clocking over 20% rise a year ago.

Within chemicals, petrochemicals have been an outlier with a sharp decline, even as other sub-categories have seen a pronounced uptick.

In the basic metals’ pack, the iron and steel category continued to record a decline even though the slowdown has been moderate compared to the year-ago period.

Within the infrastructure sector, credit flow to airports decelerated sharply last month after almost rising 50% in July 2021 over the year-ago-period. The railways sector, other than Indian Railways, suffered a similar fate with a decline as against a single digit growth a year ago.

Ports, in particular, remain in the docks with nearly 30% decline in credit, as against 20% decline in a year ago.

The picture was similar on the services side with credit to shipping and aviation skidding after a robust over 20% jump in July 2021 over the previous year.

Another exception in the personal finance side was gold loans, which saw credit growth decelerating sharply to just 5.6% after rocketing 89.5% a year back.