Bank Loan – Sectoral Composition and Growth Trend

The continued crisis in the financial sector has led to a credit squeeze and a dramatic shift in the sectoral distribution. The shift is so sharp that “Industries”, which received credit of about Rs 15 lakh crore during FY09-14, could garner only Rs 3.7 lakh crore in the next five years, as per RBI data. Aggregate credit growth has come down sharply from 16% CAGR during FY09-14 to less than 9% during FY14-19 and more worryingly, has declined in the first half of FY20.  Here is a look at the composition of bank loan over last ten years and their growth rate.

Loans are classified into four broad categories – Industries, Services, Personal (or retail) & Agriculture. Of these, Industries is the largest segment with total borrowing of close to Rs 28 lakh crore at the end of Sept’19 (H1’FY20). Credit trend for the segment is most insightful whose growth rate has come down sharply from 19% during FY09-14 to barely 3% in FY14-19. More importantly and quite worryingly, loan outstanding for the segment has come down by a noticeable 4% during H1’FY20, feeding into the slowdown witnessed by the economy. The contrast is most visible by the fact that the segment received half of the total loan disbursed during FY09-14 which fell down to just 12% in the next five years. The shift is, quite obviously, due to sharp increase in NPA for the segment and consequent adherence to much stricter credit norms. Major segments within Industries with high loan exposure are Power sector (Rs 5.6 lakh crore) and Iron & Steel (Rs 2.7 lakh cr). It is interesting to note that credit growth to these segments grew by 97% and 66% CAGR during FY09-14! No wonder these two accounts for largest share of bank NPAs.
The second category, Services account for Rs 23.6 lakh crore or about 27% of total loan. Credit is fairly well distributed across wide spectrum of services such as Trade (both wholesale & retail), Commercial Real estate, Transport etc. Aggregate credit growth to this category has seen relatively less decline moving from 16% to 13%. The segment, however, appears to be having a mixed time with credit growth touching a low of 5.7% in FY15, jumping back to 16% during FY16-19 and again declining by 2.2% in H1’FY20. A closer analysis of segment further reveals some interesting facts. First, while wholesale trade growth has come down sharply from 20% to 8%, retail growth maintains the momentum at about 13-15% range. This probably points to the cooling of hype surrounding the mega-marts, many of whom have closed down. Second, despite the general perception of funds drying up for NBFCs, credit growth to the segment has remained robust at 29% in FY19 and 11.3% during H1’FY20. Growth rate is also above average for real estate sector at 9% and 8% respectively. While these segments may be experiencing credit squeeze, it could be from other market sources and not bank loan.
The third category, personal loan or retail segment, also accounts for nearly the same as services sector at Rs 23.6 lakh crore. This is also an interesting category as it witnesses increase in growth rate from 12% to 17% during the two period. The segment cornered close to 40% of incremental loan during FY14-19 against only 15% in the previous period. Retail segment has, thus, provided an alternate avenue to the banking sector for funds deployment and helped them re-align their lending strategy. The fourth category, agriculture accounts for just over Rs 11.3 lakh crore loan, with growth rate falling from 14% to 11%. While there is no separate classification within agriculture, amount of credit going to marginal farmers would have provided greater insights.
Other than the above mentioned classification, loans are also classified as priority sector and non-priority sector loan. Other than Agriculture, priority sector comprises of loan to MSME both within manufacturing and services and segments within housing. Although banks are required to extend 40% of loan to these segments, their share over last few years stands in the range of 30- 35%.

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