An era of low bank loan growth to India Inc may be here

Apart from non-performing assets (NPA), banks in India are also facing a 'loan disbursement' problem. 

Loan growth, which stood at double-digit of 17% in financial year 2012, has now reached to 5% by end of FY17 -- a six-decade low. 

Almost all sectors saw a decline growth rate in credit disbursement FY17 with credit to industry being the lowest performer with a negative trend of 4.7% compared to 9% in FY12-16. 

Although bank loans have contracted,  this does not mean business activity is slowing down in India. 

Loan and credit substitutes are performing in opposite directions. Where loan growth was at 5.1% in FY17, credit substitutes was at 23% year-on-year in January 2017.

Recent data of Reserve Bank of India (RBI) showed bank credit growth stood at Rs 76.31 lakh crore for the fortnight of April 14, 2017, rising 5.52% from Rs 72.31 lakh crore in the week to April 15, 2016.

Shashin Upadhyay analysts at ICICI Securities said, "With relative improvement in the macro-economy, we estimate systemic loan growth rate to rise to 10% YoY in FY18."

He believes three things will aid the performance of loan growth in FY18. First, waning credit substitution as banks effectively price as per the MCLR curve; second, continued growth momentum in retail, aided by declining product rates and a modicum of revival in corporate credit on higher inflationary expectations and lastly, improved utilisation of industrial capacity.

ICRA, in its report said, "Declining interest rates, driven by demonetisation, will prompt existing bank borrowers to shift from base rate system to the new MCLR mechanism as it will help them reduce repayment cost."

Meanwhile, retail credit aka personal loans will be another driving factor for banks credit growth. 

On sector-wise performance, personal loans share of bank credit has increased to 22.7% at Rs 15.40 lakh crore compared to average 17.5% share between FY12-FY16. 

In line with the recent decline in MCLR and base rates, there is sharp increase in affordability further aiding improvement in retail loans, especially home loans.

Housing loan growth in FY17 stood at Rs 8.20 lakh crore, rising 9.80% from Rs 7.46 lakh crore in FY16. 

ICICI Securities said, "We expect retail credit demand to be driven by home loans, given the increased affordability on falling product rates, favourable demographic drivers (nuclear families, internal migration) and government incentivisation (upfront interest subvention in affordable housing)."

Crisil Research said, “We expects bank credit growth to remain muted at 8-10% in fiscal 2018, led by low industrial capital expenditure and continued refinancing through bond markets. Retail sector growth will continue to show higher growth as consumption demand gradually picks up and cost of borrowing falls.”