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Bank lending to industry at seven-year low

( 17:00, 09-May-16)

Bank lending to industry, as a percentage of gross domestic product (GDP), slumped to a seven-year low in 2015-16 (see chart). Bank loans to industry accounted for a mere 13.4% of the total increase in non-food credit in the fiscal year.

Interestingly, all the incremental bank credit to industry in 2015-16 went to large industry, while there was a contraction in bank credit to micro and small- and medium-sized industries. How this squares with the recent claim that small industries are doing better is a mystery. The facts are as follows: the share of small and micro industries in total bank credit to industry went down from 15.5% in 2007-08 to 13.6% in 2015-16; the share of medium-scale industry fell from 12.9% to 4.2% over the period; while the share of large industries went up from 71.6% to 82.2%.

More worrying is the fact that bank lending to the infrastructure sector accounted for 35.3% of all bank loans to industry in 2015-16, up from 23.9% in 2007-08, as the government dipped into the till of public sector banks in order to fund infrastructure projects. Moreover, in 2015-16, bank lending to the struggling metals and metals products sector accounted for 15.2% of all bank lending to industry. Putting it bluntly, over half of bank credit to industry is to the troubled infrastructure and metals sectors.

Nor has there been any let-up in financing to these sectors recently. In fact, in 2015-16, 55% of the increase in bank loans to industry went to the infrastructure sector. Another 38% went to the iron and steel sector. Unless there’s a turnaround soon in these businesses, the lenders could be in deep trouble.

With credit to industry dwindling, banks turned to personal lending. Personal loans advanced by banks as a percentage of GDP, at 10.26%, reached an eight-year high in 2015-16. Personal lending has been the mainstay of banks in the last couple of years. In fact, personal loans accounted for a bit more than two-fifths of the increase in non-food credit in 2015-16.

Is the surge of personal loans a sign of trouble ahead? Not really—over half of these are housing loans, which are relatively secure.

Source - Mint

 

 

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