Slowing Credit Growth in Industry as New Projects Decline: A Sign of Economic Change

26 Oct, 2023

Slowing Credit Growth in Industry as New Projects Decline: A Sign of Economic Change

Credit Expansion to the Industry Slows Down Amid Declining New Projects

According to the latest data from the Reserve Bank of India (RBI), the growth of credit extended to the industrial sector is showing signs of deceleration. Total non-food credit growth has marginally decreased from 16% in August 2022 to 15% in August 2023. Particularly concerning is the sharp decline in credit outstanding to the industry, which has fallen to 6.1% at Rs 33.89 lakh crore, down from 11.4% a year ago.

The larger industrial sector has experienced a significant drop in credit growth, with credit outstanding to this segment falling to 5.4% (Rs 25.30 lakh crore) in August 2023 from 6.3% a year earlier. Medium-sized businesses have also faced a substantial decline, with credit growth plummeting to 9.8% (Rs 2.55 lakh crore) from a robust 36.6% in the previous year. Even micro and small industries have been affected, with credit growth slowing to 10.7% from 27.7%.

This deceleration in credit growth coincides with a reduction in the number of new projects initiated in the past two quarters. The data suggests that private investments are yet to gain momentum, despite early signs of a revival in India's private capital expenditure cycle. The improvement in corporate profitability, driven by easing input prices and increased capacity utilization above 75%, is expected to play a key role in the recovery of private investments in the medium term.

While the private sector has been more active in announcing new projects in the first half of FY24, it lags behind the government sector in terms of completing projects and projects under implementation.

Data from the Centre for Monitoring Indian Economy (CMIE) reveals a significant slowdown in net new projects during the first half of FY24. The value of newly announced projects dropped from Rs 6.6 lakh crore in Q1 of FY24 to Rs 1.2 lakh crore in Q2 of FY24, compared to Rs 13.4 lakh crore in Q4 of FY23. It's important to note that a substantial portion of the new investment projects in the previous quarters was related to aircraft purchases by Air India and InterGlobe Aviation, which were not present in Q2 of FY24.

In terms of specific industries, credit growth has accelerated year-on-year for basic metal and metal products, as well as textiles, in August 2023, compared to the same period in the previous year. However, credit growth to industries such as chemicals and chemical products, food processing, and infrastructure has decelerated.

According to an SBI research report, lenders may find reassurance in the fact that secured loans, especially housing loans, constitute a significant portion of the retail portfolio and are mostly long-term in nature. In contrast, unsecured loans, like credit card outstanding, are primarily demand loans with a lower presence on lenders' balance sheets. Additionally, the higher return on investment (RoI) associated with unsecured loans often encourages borrowers to opt for pre-payment in many cases.

In summary, the deceleration in credit expansion to the industrial sector is indicative of the current challenges facing private investments, primarily attributed to the decline in new projects.