Credit Growth Stalls in First Half

8 Jul 2024 , 11:20 AM

In contrast to the previous year, bank lending decreased in the June quarter. This decline is probably due to investors’ tendency to wait and see until the election results are known.

As an indication of the level of economic activity, incremental loans climbed by ₹2.79 lakh Crore, or 1.7%, this fiscal year up to June 14 compared to ₹3.48 lakh Crore, or 2.5%, the previous year. This decline in credit demand for investments and working capital needs is the reason for the increase. The non-food credit offtake had a notable decrease of ₹68,266 Crore in the two weeks that concluded on June 14. It is quite uncommon for the credit cycle to go negative in June.

According to statistics analyzed by Bank of Baroda from the Centre for Monitoring Indian Economy (CMIE), investment plans in the manufacturing sector reached a 20-year low during the quarter. In the first quarter of the year, there were announcements of investments totaling ₹44,300 Crore.

The previous low point was reached in June of 2005. “The elections are the only thing that can be linked to sluggish intentions, considering the steady growth of the economy.” It’s likely that the industry has been waiting to make any decisions about investments. However, this hasn’t always been the case when elections have been held, according to a Bank of Baroda research paper.

A similar pattern is seen in the first quarter of the year’s corporate bond issuances, according to CMIE data. From ₹1.43 lakh Crore in Q1-FY23 to ₹2.86 lakh Crore in Q1-FY24, overall issuances rose, but they dropped precipitously to ₹1.73 lakh Crore in Q1-FY25.

Since that the budget won’t be released until late July, there may be some improvement in the second quarter. “Investment could increase at a faster pace during the festival season, which starts from end-August and lasts till December, provided there is a good monsoon and steady demand,” the Bank of Baroda research stated.

As Governor Shaktikanta Das of the Reserve Bank of India stated in his April monetary policy announcement, even policy makers have hope for the future. “Due to a steady broadening of the private capex cycle, there is still hope for investment activity,” stated Das. Investment activity is improving in a number of industries, including electronics, construction, telecommunications, roads and railroads; food processing; drinks and tobacco; textiles; chemicals and chemical products; cement and cement products; iron and steel; and so on.

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