Bank credit in India 1980-2019: Understanding the boom in 2000s and the period after.

Summary

We put together a consistent long term dataset on bank credit in India for the period 1980-2019. The dataset helps us analyze how India’s banking industry evolved over the last 40 years, its importance to the economy and to whom credits were provided to. We notice that in early 1980s until early 2000s, bank credit as a ratio to GDP was nearly static around 20%. A noticeable transformation took place from 2002 onwards. The ratio rose rapidly from 24% in FY2001-02 to 46% in FY2007-08. A moderation came as quickly as the start of the ascent though. A slow growth period followed from 2011 onwards as the non-performing assets problem started to surface. Measures taken by policymakers since 2014 seems to further put a break on rapid growth in bank credit in order to prevent further deterioration of banks’ balance sheet.

Bank credit to GDP was stable around 20% until early 2000s

Through much of 1980s and 1990s, the Indian government tended to intervene in the banking sector, partly to encourage banks to lend to the agricultural sector. Through this period, the ratio of bank credit to GDP fluctuated in a narrow band of between 18% and 24%.

Through 1980s and 1990s banking in India was a stable affair

Despite the agriculture friendly policy of the government, the share of lending to agriculture in the total bank credit only rose from 13% in early 1980s to 16% in late 1980s. Since 1980s, the credit to industries has constantly bagged a larger share in total bank credit followed by personal & services sector (refer appendix to see how we have grouped loans to personal and service sector).


1991: Liberalization reforms in Indian banks

Unmanageable international balance of payment, persistent fiscal deficit and an increase in global crude oil prices during late 1980s forced the Indian government to deregulate the economy in 1991. The Indian banking sector was one of the important industries affected by the deregulation, changing the role played by foreign banks & private banks to increase competition. Allowing greater foreign investment was also a key factor to bring changes to the banking sector. In our view, the liberalization in the Indian economy after 1991 put a seed to the later growth of India’s banking sector.

Surge in bank credit as a % to GDP from early 2000s.

In mid-1990s, the bank credit as a ratio to GDP started to take-off, culminating in the rapid ascent between 2002 and 2007. The bank credit to GDP ratio rose from 24% in FY2001-02 to 46% in FY2007-08. In a matter of seven years, credit to GDP ratio nearly doubled. In INR terms, bank credit quadrupled from Rs.5.4 trillion to Rs.22 trillion. The rapid GDP growth in the economy, urbanization and accompanying easier access to bank credit can be attributed for the sudden acceleration. In the seven years, India’s GDP grew at a compound annual growth rate of 8% between 2003 to 2010 and peaked in 2011 at slightly over 10% growth.

The high growth years between 2003 and 2010 led to explosion in growth of bank credit.

Note: The years in the graph represent the fiscal year, for instance, the year 2009 represents the period Apr'09-Mar'10. with 2011-12 as the base year for the entire series.  

Along with the rapid growth in the economy, the amount of capital flowing into the economy also increased. Foreign direct investment (FDI) as a % to GDP increased from 24% in FY2001-02 to 67% in FY2009-10. The financial liberalization eased foreign inflows as the definition of FDI-led industries was loosened to follow the IMF guidelines.

Foreign direct investment to GDP ratio rose from 24% in 2002 to 67% in 2010.

During this period of high growth, there was also a shift in who received bank credits. Personal & services sector saw a rapid increase in importance relative to other sectors. While the industrial sector received 50% of the total bank credit in FY1979-80 as against 37% for personal & services, by FY2006-7, it was the personal & services sector that received 52% of the total and share of credit to industries fell to 36%. Housing loans accounted for the largest share within total personal loans.

Rise in importance of services and personal loans relative to other sectors during 2002 till 2010.

Credit to infrastructure sector increased at a faster pace since 2003.

On a different note, credits to infrastructure sector accounted for an increasing share of the total bank credit. It rose from 6.5% in 2003 to 7.5% in 2007 and further continued to see an increase to 14.2% in 2011. The ‘Golden quadrilateral’ program from 2001 onwards for road reconstruction indicates the government’s increased push to infrastructure lending. Credit growth to industry saw a consistently YoY growth till FY2013-14.

Infrastructure’s share in Bank credit.

Non-performing assets problem took center-stage post-2010.

Rapid growth in credit provisioning between 2003 and 2010 led banks to hide their accumulated non-performing assets (NPAs) though. In order to address the problem, the RBI undertook an asset quality review (AQR) in Q2 FY2014-15. As a result of AQR, there was reclassification of NPAs that led to reporting of fresh NPAs in banks’ balance sheet. Following the spike in NPAs in 2017, the RBI revised the guidelines entailing Prompt Corrective Action (PCA) policy, which restricted banks in making fresh lending unless they met a certain level of capital adequacy ratio, return on assets and leverage ratio.

Public sector banks disproportionally suffered from the NPA problem

Between 2017 and 2018, the Indian banks, especially public sector banks were under stress as the gross NPAs of public sector banks to their total loans increased from 9.3% in 2017 to 14.5% in 2018. This put pressure on the banks' capital, and then we started to see a downward trend in the growth of bank credit provision.

Conclusion 

From our analysis, we see that Indian banking industry was a stable affair in the Indian economy, partly due to the heavy guidance and regulation from the policy makers. Through the liberal policy reforms, the economy saw a period of high growth in the early 2000s and a large influx of foreign investments. A transformation followed in the bank credit provisioning between 2003 and 2010. From 2014, a continuous deterioration in the health of banking sector followed as a result of worsening of banks’ asset quality. The regulators had put a break on growth in bank credit in order to prevent further accumulation of non-performing assets.

Appendix:

  • The annual time-series data for sectoral deployment of bank credit has been taken from RBI’s Handbook of statistics on Indian economy.
  • The dataset published on the RBI website is available in two versions- old report format and new report format. The data in the new report format goes back to 2008.
  • We have combined the two formats in order to get historical data for a longer time period. Credit to industries from 1980 until 2007 is a summation of credit to small industries and credit to medium and large industries.
  • Credit to personal and service sector from 1980 until 2007 is a summation of credit to other sectors, wholesale trade and priority sector excluding agriculture. On RBI website, from 2008 separate data for personal loans and services sector and with credit to the different components is available.
  • Credit to infrastructure industries since 1998 has been taken from Industry-wise sectoral deployment of credit.