Spurt in loan growth in Oct may not hold as it was led by lending to NBFCs

Surge in October driven by unsecured retail lending and to non-banking financial companies

Some banking experts have been upbeat over October’s loan growth at 15 per cent touching a five-year high. While this is indeed a milestone, the devil is in the detail.

A finer reading prompts one to question if this trend is sustainable. Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, has in fact said these numbers would mean a slowing in growth has set in earlier than anticipated.

One of the important factors which has led to these doubts is 27 per cent year-on-year growth in loans to the services sector. This is led by a 56 per cent increase in lending to non-banking finance companies or NBFCs. Much of this could be attributed to the pre-liquidity crunch days, when banks were more forthcoming in lending to this segment.

Analysts at Kotak Institutional Equities affirm a likely slowing in loans to NBFCs on account of several events that have unfolded since October. Adding: “It is likely that certain segments within the retail (small borrower) portfolio (vehicle finance, small-size housing loans) could slow down, rather than a possible shift in market share to banks, especially private banks,” they explain.

Another aspect is the spike in share of unsecured loans within the retail basket. If the total retail segment grew by 17 per cent in October, unsecured products such as credit card business and personal loans grew faster, at 31 per cent and 22 per cent year-on-year, respectively. As their relevance in the segment has increased by 200 basis points to 31 per cent of total retail loans in the past year, analysts aren’t pleased at the rapid growth in the unsecured portfolios. “This share is at a risky level, as they account for a third of total retail loans,” says Rakesh Kumar of Elara Capital. “Any change in business environment increases the likelihood of negative surprises from this segment and credit costs could spike.”

Growth in traditional retail pockets such as home loans and vehicle loans has exhibited some slowing, echoing the trend of their underlying markets.

Another aspect, soft for some months, is industrial credit offtake. As the October numbers were a shade lower than the previous month, this further delays hope of full recovery in corporate loan demand. A marginal positive is some improvement in loans to medium and large companies, up 11 per cent and four per cent, respectively, year-on-year in October. That said, growth has remained shaky in these segments over the past few months and not compelling enough to be termed as sign of a turnaround.

The headline improvement in October did prompt analysts such as those at Prabhudas Lilladher to envisage moderate loan growth improvement in 2018-19. How the trend unfolds, particularly in the three key pockets mentioned, will assume greater importance.