Urban consumption likely to be hit by slowdown in bank credit growth: Crisil report

The recent slowdown in the bank credit growth especially in the personal loans is likely to impact the consumption in the urban areas, says a report by Crisil.

The report indicated that the delayed impact of past interest rate hikes by the Reserve Bank of India (RBI) is beginning to show up in the broader economy, with bank credit growth decelerating over the last three months. This slowdown is especially concerning for the personal loans segment, which has a direct link to consumer spending in urban areas.

"The lagged impact of the RBI's past rate hikes is gradually being felt in the broader economy. Bank credit growth has been slowing in the past three months, including for personal loans. This is likely to impact consumption, especially in urban areas" said the report

The report highlighted that in October, overall bank credit growth dropped to 11.5 per cent, down from 13 per cent in September, marking a significant deceleration. Sector-specific data for September shows that credit growth has eased across multiple categories.

For instance, growth in agriculture loans slowed to 16.4 per cent from 17.7 per cent, while credit to the industrial sector fell to 8.9 per cent from 9.7 per cent.

Similarly, credit growth in the services sector dipped slightly from 13.9 per cent to 13.7 per cent, and personal loans, an important driver of consumer spending, saw growth ease to 13.4 per cent from 13.9 per cent.

As per report, a closer look within the personal loans category reveals that credit card growth, which fuels a substantial amount of discretionary spending, slowed sharply to 18 per cent from 19.9 per cent.

Credit growth for non-banking financial companies (NBFCs), a component of the services sector, also declined significantly to 9.5 per cent from 11.9 per cent, partly due to the RBI's recent crackdown on risky lending practices.

This credit slowdown could have a significant impact on urban consumption, as many urban households rely on personal loans and credit cards for both essential and non-essential purchases.

With lending growth curbed, urban consumers may face tighter access to credit, potentially curtailing their spending and affecting overall economic momentum.

The report suggested that the RBI is likely to wait for further clarity on the extent of risks posed by slowing credit growth before considering a rate cut.

It said "The RBI may like to get clarity on how these risks will play out, before going in for a rate cut. Overall, we expect one rate cut by the RBI this fiscal".