Pandemic Effect: Credit Growth Becomes More Distributed

Financial year 2020-21 has been a challenge for most individuals and businesses. Headline gross domestic product (GDP) numbers shrank by 7.3 per cent in India due to the severe impact of the pandemic.

An important indicator of economic health is credit growth. The Reserve Bank of India (RBI) reported a growth of 5.6 per cent in credit provided by scheduled commercial bank in financial year 2021 (FY21). The stock of credit grew to Rs 110 lakh crore from Rs 104.5 lakh crore in this period.

During this time, the deposit growth was healthier at 12.3 per cent and the stock of deposits with scheduled commercial banks grew to Rs 154 lakh crore from Rs 137.5 lakh crore. So, the credit to deposit (C/D) ratio worsened from 0.76 to 0.71 in the last financial year. Here, we will examine credit growth.

While credit growth was quite low in FY21, the credit growth across the vast nation provides a very fascinating picture.

Credit Growth Across States

The map of India with annual credit growth across states and Union Territories (UTs) paints a remarkable picture.

Three states/UTs (Maharashtra, Delhi and West Bengal) accounting for 42 per cent of the credit, grew by a total of 0.7 per cent in FY21.

- Credit in Delhi, with a 12 per cent share in credit, shrank by 3 per cent.

- Credit in the remaining part of the country grew by 9.3 per cent.

- Among states with more than 4 per cent credit share, three states (Andhra Pradesh, Uttar Pradesh and Telangana) stand out with double digit growth.

- Credit in Andhra Pradesh grew by 16 per cent.

- Economically smaller states and UTs reported uniformly high credit growth as can be seen from the map.

- Newly formed UTs of Jammu and Kashmir and Ladakh achieved a credit growth of 18 per cent and 20 per cent.

The map clearly points to a significant deviation in growth rates of credit across the country.

Contribution To Credit Growth

To understand the impact of this geographical spread of growth rates on overall credit, it is critical to look at the contribution of the regions to the total growth in credit in this period.

Tamil Nadu, with a 9.4 per cent credit share, contributed 12 per cent to the country’s growth, marginally higher than Maharashtra.

Andhra Pradesh with a 4.3 per cent credit share, contributed 11 per cent to the growth.

Maharashtra with a credit share of 26 per cent, contributed to 12 per cent of the credit.

If one examines data across a few years, a couple of regional shifts can be noticed:

- Credit in India grew at a compounded annual growth rate (CAGR) of 8.6 per cent in four years.

- In this period, CAGR of credit growth in Maharashtra is 5.9 per cent and the state’s share in credit has reduced from 29 per cent to 26 per cent.

- West Bengal has seen a CAGR of credit at 0.9 per cent in the last four years, and its share in credit has dropped from 5 per cent to 3.8 per cent.

- Three states (Maharashtra, Delhi and West Bengal) had a credit share of 46 per cent, which has dropped to 42 per cent in four years, as credit in all the three states has been below the national average.

- Uttar Pradesh credit has seen a CAGR of 10.6 per cent and its share of credit has inched up from 4.4 per cent to 4.8 per cent.

Clearly, growth dynamics are changing across the country. One wonders if the picture is similarly changing within a state.

Credit Growth Within States

Credit in the state grew by 11.7 per cent in FY21. Four year credit CAGR was 10.6 per cent, indicating an acceleration in credit growth. Interestingly, while C/D ratio of India dropped from 0.74 to 0.71 in four years, UP’s C/D ratio went up from 0.39 to 0.41. So, opportunities for credit absorption have increased in this time.

A picture says a thousand words. Map of credit growth in FY21 in UP is a sea of green, with more pronounced growth in the central (Awadh region) and eastern (Poorvanchal) parts of the state.

- Four districts closest to Delhi (Gautam Buddha Nagar, Ghaziabad, Agra and Meerut), with a state credit share of 23 per cent, contributed only 15 per cent to the state credit growth.

- The state capital of Lucknow saw a credit growth of 28 per cent, with incremental credit of Rs 13,300 crore.

- To put this in context, this is the same as the increase across the two districts comprising Mumbai and marginally higher than the increase in Bengaluru Urban district. Those districts have orders of magnitude higher amount of credit stock than Lucknow.

- Credit growth has been consistently high for many districts in Awadh and Poorvanchal regions, for the last four years.

- Jaunpur, Varanasi, Ghazipur, Prayagraj, Chandauli, Kaushambi, Rae Bareli, Ayodhya, Pratapgarh, Ambedkar Nagar — have all seen credit CAGR of more than 15 per cent in this time.

- Lucknow credit CAGR was 14 per cent in the last four years.

- Districts close to Delhi have grown at the pace of the state or lower.

- Gautam Buddha Nagar, Ghaziabad, Meerut have seen a credit CAGR of 8-11 per cent.

Analysis Summary

- Credit growth is a good indicator of economic activity.

- Different states have varying degrees of economic activity, reflected in credit data.

Two key trends seem to be pushing credit growth in FY21:

a. Infrastructure push

b. Worker migration

Trend of credit growth moving to newer regions and centres is quite clear. It is quite likely that the pandemic driven changes to migration accentuated this trend. As newer centres of growth emerge quite quickly, enterprises need to be alert to these and plan their distribution networks to cater to new customers.

View From The Practitioner

Sanjeev Moghe is the head of credit cards and payment solutions at one of India’s largest banks, Axis Bank. It has millions of customers and merchants spread across the country. Geographical distribution of network and transactions is extremely crucial for Moghe.

- Understanding regional shifts which help identify new hotspots of growth.

- Informed decisions on planning distribution network.

- Growth projects can be planned at local level, keeping in mind local market share.

To use a phrase of the great Indian poet, bhavabhuti (भवभूति), (from a slightly different context), विपुला च पृथिवी (the world is vast). So, financial companies need to start spreading their network across the nation, as growth becomes more distributed.

This article first appeared in Latlong and has been published here with permission.