What the credit offtake data shows about the state of the economy

In one of the surest signs that the Indian economy is finally taking off again, non-food credit saw a 17% spike in September as compared to the year ago period. 

This, even as small-sized loans continue to account for a bigger share of the credit portfolios of banks. 

In September last year, such advances had contracted 2.9%, the Reserve Bank of India's data on sectoral deployment of bank credit showed, according to a report in The Economic Times.

On a year-on-year (y-o-y) basis, non-food bank credit increased 17% in September 2022, compared with 6.8% a year ago, the report said.

What does a break-up of the data on credit offtake look like?

Size-wise, loans to large businesses accelerated to 7.9% against a contraction of 2.1% a year ago. Medium industries recorded credit growth of 36.2% in September 2022 as compared with 37.1% last year, while credit to micro and small industries rose 27.1% versus 13.1% a year ago.

And what does the macro picture show?

Overall credit to industry rose 12.6% in September 2022 as compared with 1.7% in September 2021, RBI data indicated. Loans to industry accounted for 26% of gross bank credit as of end September.

Retail loans grew 19.6% in September 2022 versus 13.2% a year ago, largely driven by housing and vehicle loans segments, the central bank said.

So, why is the rise in non-food credit significant?

The rise in non-food credit means that businesses are borrowing more to meet growing demand and for fulfilling their capex requirements. This, in turn, means that the Indian economy is picking up pace and could register stronger than expected growth numbers going forward. 

Households borrow to fund housing, education, consumer durables, vehicles and other personal expenses. Non-banking finance companies (NBFCs) borrow from banks to on-lend to customers. Thus, a sustained rise in bank credit usually signals an economic recovery.

To be sure though, several other factors could be at play here and therefore the numbers are only indicative and not definitive of any major trend reversal.