What drives bank credit growth?

by Janaki Samant

Demand for personal loans has turned out to be strong during the first quarter of 2022-23. Increase in outstanding credit for personal loans was robust in April. It slowed in May but recovered again in June. This was a quarter when interest rates started rising from an all-time low after a long hiatus. At the same time, retail inflation surged to an 8-year high of 7.4 per cent. Despite this double whammy, retail loan demand remained firm during the quarter.

In June 2022, outstanding personal loans grew by 1.5 per cent over the preceding month. This was the highest growth among the major segments of bank loans. A similar trend was observed in April, too.

Cost of borrowing will rise further as the RBI is set to hike policy repo rate. But a relatively benign outlook on inflation and the onset of the festive season is likely to hold up demand for personal loans. News reports suggest that banks are likely to raise rates. They seem to have taken cue that the recent increase in rates do not seem to dampen demand for personal loans.

Disbursal of personal loans by scheduled commercial banks (SCBs) increased by Rs.1,342 billion in the quarter-ended June over the preceding quarter. This has been the highest disbursal of personal loans compared to that in the first quarter of any fiscal year in the past.

In June 2022, personal loans increased by Rs.522.5 billion. Increase in loan offtake had slowed to Rs.248 billion in May from the Rs.571.7 billion increase in April.

The buoyant performance of the retail loan segment was driven by higher disbursals to the housing segment. Housing loans make up half of outstanding personal loans. Vehicle loans make around 10-12 per cent. Share of credit card outstanding is at four per cent whereas loans for consumer durables account for less than one per cent of personal loans. The category ‘other personal loans’ makes up a substantial chunk of 25 per cent.

Housing loans increased by Rs.565 billion during the quarter ended June 2022. This was the highest disbursements in any June quarter of the past fiscal years. This increase in disbursements for housing loans indicates that home buyers do not seem to have been deterred by the rise in interest rates.

The Reserve Bank of India (RBI) hiked policy repo rate in May and June. Together the increase works out to 90 basis points (bps). Floating interest rates on retail loans particularly those that were linked to the repo moved up in sync with the rise in policy repo rate. So, interest rates on loans for housing also recorded a corresponding increase of a similar magnitude.

The interest burden is set to increase further. The RBI will announce its third monetary policy review on August 5. Following the 75 bps hike by the US Federal Reserve on July 27, the RBI is also expected to raise policy repo rate by 35 to 50 bps. This will further increase the cost of personal loans.

In anticipation of another RBI rate hike, HDFC, the country’s largest housing finance company, hiked its benchmark retail prime lending rate (RPLR) on July 31. This was the fifth hike in the 2022-23 fiscal year in as many months. It hiked the rate by 25 bps to 8.8 per cent. With this hike, HDFC has increased its minimum lending rate by 115 bps in the current fiscal year, so far. Following the hike, the interest burden for borrowers with a loan of Rs.5 million with a 20-year tenure is likely to go up by Rs.10,000 per annum. Incidentally, HDFC reported its highest-ever first quarter disbursements during June 2022.

Outstanding vehicle loans increased by Rs.93 billion during June. This was almost double the increase of Rs.48 billion in the preceding month. April had recorded higher loan disbursals at Rs.108.7 billion.

In case of vehicle loans, it is lower sales due to supply constraints which is likely to have reflected in lower demand for bank loans. Pending booking orders are still very high. But availability of semi-conductors for automobiles is improving as demand from the consumer electronics industry has reportedly come down. At the same time, supply has also improved. Banks reportedly account for 70-75 per cent of loans for passenger vehicles compared to 40 per cent in the commercial vehicle loan segment. We believe that rise in sales of passenger vehicles because of easing of supply constraints in the coming months should reflect in higher disbursements of vehicle loans.

Outstanding loans on credit cards increased by Rs.51.4 billion in quarter-ended June 2022. The increase was lower when compared to the June quarter of 2019 and 2018, that is, before the pandemic period. This could be because of timely payments of credit card bills. But an alternative data release from RBI indicates a slowdown in credit card spends. Actual payments through credit cards at point of sale and for online purchases declined by four per cent in June over the preceding month.

Loans for consumer durables increased by Rs.28.5 billion during quarter-ended June 2022. This was also the highest June-quarter increase. From the increase of Rs.12.8 billion in April, disbursals slowed to Rs.7 billion in May and rose only marginally by Rs.8.7 billion June. There appears to be slowdown in credit offtake for consumer durables, though the overall June-quarter performance is good. Discretionary demand has reportedly slowed on high inflation. But the arrival of the festive season might revive demand for consumer goods in the near future.

Increase in other personal loans moderated sharply in June 2022 compared to April and May. But the robust increase in the first two months contributed to disbursals of Rs.433.1 billion, the highest in any June quarter.

Credit growth in the major segments of personal loans such as housing and vehicles have remained robust in the face of rising interest rates. Apparently, credit demand from the higher income classes is intact. Demand for consumer durables reflects, to a greater extent, demand from the more modest-income groups. This has slowed. Apparently, there is an income effect in play in the demand for credit.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.4 +0.5
Consumer Sentiments Index
Base September-December 2015
73.4 +0.2
Consumer Expectations Index
Base September-December 2015
72.0 0.0
Current Economic Conditions Index
Base September-December 2015
75.6 +0.6
Quarterly CapEx Aggregates
(Rs.trillion) Sep 21 Dec 21 Mar 22 Jun 22
New projects 3.34 3.91 7.76 3.79
Completed projects 1.28 2.76 1.25 1.05
Stalled projects 0.28 0.08 0.28 0.25
Revived projects 0.39 1.98 0.28 0.28
Implementation stalled projects 0.26 0.65 0.09 0.08
Updated on: 08 Aug 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Sep 21 Dec 21 Mar 22 Jun 22
All listed Companies
 Income 27.5 23.4 20.9 39.6
 Expenses 26.7 21.3 19.8 42.5
 Net profit 55.8 35.4 32.1 9.4
 PAT margin (%) 9.6 9.0 9.1 7.1
 Count of Cos. 4,695 4,739 4,575 1,430
Non-financial Companies
 Income 35.6 29.1 24.9 51.9
 Expenses 35.9 28.7 25.6 57.5
 Net profit 59.4 19.1 12.5 -9.5
 PAT margin (%) 8.8 7.5 7.9 5.4
 Net fixed assets 4.9 2.2
 Current assets 10.9 15.2
 Current liabilities 0.8 11.7
 Borrowings 12.2 3.6
 Reserves & surplus 12.4 11.5
 Count of Cos. 3,382 3,424 3,317 1,041
Numbers are net of P&E
Updated on: 08 Aug 2022 8:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.6 -0.9 18.9
 Expenses 0.4 -3.2 16.4
 Net profit -5.8 73.4 62.3
 PAT margin (%) 2.0 4.4 10.9
 Assets 9.0 9.9 10.1
 Net worth 4.8 11.7 12.6
 RONW (%) 3.4 6.9 13.4
 Count of Cos. 32,607 30,609 2,075
Non-financial Companies
 Income -1.1 -2.0 27.5
 Expenses -0.9 -4.0 26.3
 Net profit -22.1 64.4 58.8
 PAT margin (%) 2.2 4.1 11.0
 Net fixed assets 11.2 2.2 3.3
 Net worth 2.1 10.7 13.1
 RONW (%) 4.6 7.8 17.5
 Debt / Equity (times) 1.2 1.0 0.5
 Interest cover (times) 1.9 2.4 6.9
 Net working capital cycle (days) 82 86 44
 Count of Cos. 25,804 24,027 1,526
Numbers are net of P&E
Updated on: 05 Aug 2022 10:42AM