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Credit growth picks up during the first two months of GST

LiveMint logoLiveMint 02-10-2017 Manas Chakravarty

Most analysts expect a rebound in economic activity in the September quarter as businesses add inventory after de-stocking during the run-up to the introduction of the goods and services tax (GST). That expectation is borne out by the growth of bank credit in the two months from mid-June to mid-August.

As chart 1 shows, growth in non-food credit during this period has been much higher this year than for the same period in the preceding two years.

Of course, almost all the growth is on account of personal loans, and credit growth to both industry and services has shrunk during the period. That needn’t be alarming, though, as this is traditionally the slack period and growth in bank advances is tepid during these months.

What is far more interesting is that the fall in credit to industry is much less than in the same period last year. Also, the fall in credit to the services sector in June-August is lesser than in the same period of 2016 and 2015.

Is the improvement in credit growth to industry and services a sign of emerging green shoots in the economy? Not necessarily—it is far more likely to be the effect of restocking. Some of it may be a reflection of the increase in working capital needed by businesses due to GST.

Have smaller businesses been affected more? Not really—chart 2 shows that credit to micro and small manufacturing businesses contracted slight less during June-August than over the same period in the previous two years, while growth to small services businesses increased. Nevertheless, this does not say anything about the informal sector, the bulk of which is out of the ambit of bank lending. Note that lending to the weaker sections of society hasn’t done very well.

The data shows bank lending to both industry and services has done better during June-August this year than in the same period of 2016 and 2015. But the fact remains that the level of credit to industry as on 18 August is lower than what it was two years ago. The same is true for loans to wholesale trade, the “tourism, hotels and restaurants” segment and for micro-credit and educational loans in the priority sector.

Two months, of course, do not a trend make and it’s far too early to infer anything about the impact of GST on businesses from this data. At best, it signals a bounce for the September quarter.

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