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Credit growth weakens further in 3QFY20
Negligible growth in real credit
* Banks’ non-food credit growth moderated to 7% YoY in Dec’19, marking slowest growth in two years. However, our estimates of India’s non-government non-financial (NGNF) debt – of which banks account for only ~56% – suggest that NGNF debt grew only 6.2% YoY in 3QFY20, lower than 6.8% growth in the previous quarter and marking slowest growth in the past two decades. It slowed to the two-year lowest level of 81% of GDP in 3QFY20. Adjusted for headline inflation, real debt growth was marginal at only 0.3% YoY in 3QFY20, the lowest in a decade.
* NGNF credit growth slowdown was broad-based, albeit largely driven by banks, NBFCs, HFCs, corporate bonds and commercial paper, while external commercial borrowings (ECBs) are expected to have grown faster. Excluding NBFCs and HFCs, NHGNF growth was even slower at a record-low of 5.4% YoY in 3QFY20.
* Further, while household debt growth moderated to a five-year low of 8.7% YoY, non-financial corporate (NFCs) debt growth was stable at a record-low 4.3% YoY in 3QFY20. Thus, household debt inched up from 34.4% of GDP a year ago to 34.8% in 3QFY20, but NFC debt was at a 20-quarter low of 46.2% of GDP last quarter.
* Overall, these trends confirm that credit growth weakened further in 3QFY20, supporting our expectation of lower real GDP growth in the quarter. We believe that industrial real GVA will decline for the first time in 3QFY20 (since the new data began in FY13) and real investments will also decline for the first time since FY15. Real GVA/GDP growth, thus, is expected to weaken further to ~4% YoY in 3QFY20.
NGNF credit growth at record low in 3QFY20
From average 13% growth over FY16-19, total credit to India’s NGNF sector grew only 6.8% YoY in 2QFY20, which slowed further to 6.2% in 3QFY20, marking its slowest growth in the past two decades (Exhibit 1). Adjusting for inflation (measured by consumer price index (CPI)), NGNF’s real debt grew at a meager 0.3% in 3QFY20, the slowest in a decade and compared to above-9% growth in the previous four years. Further, with our estimate of 7% growth in nominal GDP in 3QFY20, the NGNF debt-to-GDP ratio declined further to 81% in 3QFY20, the lowest ratio in the past nine years and as against the peak of 83.3% at end-Mar’19 (Exhibit 2).
Massive slowdown in banks/NBFCs/HFCs/bonds, only partly offset by ECBs
A detailed lender-wise analysis suggests that lending growth has decelerated for most segments with the maximum weakness being witnessed in banks (Exhibit 3). Bank credit to the NGNF sector grew at 5.7% YoY in 3QFY20, marking slowest growth in at least the past two decades. NBFC credit growth also weakened to sub9% YoY in 3QFY20, only slightly higher than record-low growth of ~8% YoY posted in 1QFY17. Although HFC loan growth has weakened to single-digit and lowest in a decade, it was broadly stable in 3QFY20.
Interestingly, while we are mostly focused on NBFCs/HFCs, the outstanding value of corporate bonds (CBs) issued by the non-financial sector grew only 2.1% YoY in 3QFY20, slowest growth in eight years and as against very strong average growth of ~30% during the four years up to FY19.
The sharp slowdown in banks’ NGNF credit, thus, is the primary contributor to credit growth slowdown. NGNF credit by non-bank lenders – which accounts for ~44% of total NGNF debt – grew 6.7% YoY in 3QFY20, slightly better than 6.3% in 2QFY20. However, excluding NBFCs/HFCs, NGNF debt growth was even lower at 5.4% last quarter. Nevertheless, decent growth in NBFCs and HFCs would not have been possible without the support of banks since the share of bank lending to the other financial sector (NBFCs and HFCs in particular) has risen from 8.5% in mid-FY19 to >10% in 3QFY20.
On an incremental basis, total credit to the NGNF sector was down 71% - from INR12.0t in 9MFY19 to INR3.5t in 9MFY20 (Exhibit 4). Incremental lending by all domestic lenders was lower than during the corresponding period in FY19; however, ECBs’ support almost tripled from INR0.5t to INR1.4t during the period.
Further, while the share of banks in total NGNF debt has fallen consistently from ~65% five years ago to ~56% now, the share of NBFCs has risen to peak of 14.8% and close to record-high of HFCs. Surprisingly, the share of bonds has fallen from ~12.5% three years ago to 11.6% in 3QFY20, while it has risen marginally to 9.1% for ECBs
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