Indian banks gave more home loans than agricultural credit

Indian banks gave more home loans than agricultural credit

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published Published on Jan 20, 2023   modified Modified on Jan 24, 2023

In each of the last three years – from 2020 through 2022 – Indian banks lent more money to retail customers purchasing homes than they did to farmers. In fiscal year (FY)2021-22 commercial banks gaveRs. 17.54 lakh crore worth of housing loans, while agriculture and allied activities got Rs. 15.16 lakh crore. That is nearly 14 percent less. In FY 2021 and FY 2020 – one of which saw a reverse migration from urban to rural on account of the Covid-19 lockdown – bank loans to agriculture were 13 percent lower.

A Reserve Bank of India report on banking trends released in December 2022 contains this data. In fact, the report states that, “The sharp acceleration in credit growth during 2021 22 was led by services and retail loans, especially housing”. The report states further that, “In recent years, Indian banks appear to have displayed ‘herding behaviour’ in diverting lending away from the industrial sector towards retail loans. Empirical evidence suggests that a buildup of concentration in retail loans may become a source of systemic risk”.


Source: Reserve Bank of India’s Report on Trend and Progress of Banking in India 2021-22, released on 27 December, 2022

The data shows that services and retail loans account for a greater share of bank lending than agriculture and industry, before and after the Covid-19 pandemic. For instance, in FY 2019-20 lending to agriculture and industry combined was Rs. 44.92 lakh crore, while services and retail loans was Rs. 54.14 crore, 20 percent greater. This was before the pandemic. In FY 2021-22 services and retail loans got 30 percent more (Rs. 65.42 lakh crore Vs Rs 50.25 lakh crore).

The RBI’s banking data is broadly in line with the government’s estimates for Gross Domestic Product (GDP). The first advance estimate of National Income for 2022-23 shows that the share of private final consumption expenditure (PFCE)in GDP has been around 57 percent in the three years to FY 2022-23, while gross fixed capital formation (GFCF) has been in a range between 30.5 percent to 34 percent. The estimate was released on 6 January, 2023 by the Ministry of Statistics and Programme Implementation. PFCE is an indicator of the money spent by households and individuals on items of consumption like houses, vehicles, consumer durables and food. GFCF is a measure of the investments made in fixed assets in the production process.

Source: Press note on first advance estimates of National Income, 2022-23, released by MoSPI on 6 January, 2023

The data highlights the dichotomy in the Indian economy: lending for real estate projects, home loans, iPhones, tourism infrastructure, cars and two-wheelers is greater than the finance available for agriculture and industrial activity.

Farmers groups have been pointing out that union budgets have been neglecting agriculture. Budgetary allocation, which is separate from bank lending, is a statement of the government’s priorities in allocating resources. In 2020 the All India Kisan Sangharsh Coordination Committee said that budget 2020-21 failed to increase rural demand and purchasing power. It instead boosted the profits of large corporates. It said that the budget allocation for agriculture, irrigation and rural development in FY 2020-21 was Rs. 2.83 lakh crore, a marginal increase over the Rs. 2.68 lakh crore in the previous fiscal.In real terms, after adjusting for inflation, this didn’t amount to any increase. The AIKSCC said that agri input costs had risen between 33-100 percent in the past five years, but the allocations for MG-NREGA and the flagship PM-KISAN programmes had decreased.

The Alliance for Sustainable & Holistic Agriculture(ASHA) in a press release just after budget 2020-21 was presented said that the budget allocation for agriculture, allied sectors and irrigation (minus rural development) in 2020-21 wasRs. 1.58 lakh crores, which was 5.2 percent of the total budget of Rs. 30.4 lakh crores.The same sectors in 2019-20 were allocated Rs. 1.52 lakh crores which was 5.45 percent of the budget of Rs.27.86 lakh crores.

The RBI’s banking data has another statistic of concern. Education loans are the only type of retail loan to have dipped marginally before increasing in the year ending March 2022. The amount of bank lending for education was less than every other category of loans – housing, auto and credit card receivables. Only consumer durables loans were lower in volume. For instance, in the year 2021-22 banks made education loans worth Rs. 84,677 crore, which was 4.82% of housing loans, 51.75% of credit card receivables and 22.33 percent of auto loans. Education loans are considered an investment in human capital, which generates additional returns for a nation by adding to the human resources pool, which is an important component of the national economy. But the data seems to suggest that not enough bank credit is being deployed here.

Small and medium businesses are bullish on the economy and India’s growth story, but are not getting adequate financing from the banking system. “When it comes to cost of capital, our banks have not done enough,” Saket Dalmia, the new president of the PHD Chamber of Commerce, generally considered the leading industry body for the MSME sector, was quoted as saying in The Week. Badly battered by the pandemic, lockdown and subsequent economic downturns, the MSME sector has been struggling. One report last year estimated that as much as one-third of MSMEs had shut down or were on the verge of going under.

Meanwhile, the former Reserve Bank of India (RBI) Governor Raghuram Rajan cautioned Indian banks on their aggressive tilt towards retail lending, flagging potential risks involved in the event of a down cycle.
“If you see, banks in India are moving towards retail lending. Are they pricing properly? Are banks looking at the risks involved?,” Rajan told Moneycontrol on the sidelines of the World Economic Forum 2023 in Davos. The former RBI governor’s comments assume significance in the context of an aggressive retail bet by Indian banks in recent years. Most banks have witnessed significant jump in retail assets
compared with wholesale loans.

To sum up, Indian bank credit for services and retail loans is greater than for agriculture and industry. How much greater? In 2021-22 the former got Rs 65.42 lakh crore, which is 30% greater than the latter’s Rs. 50.25 lakh crore. In the previous fiscal it was 23% greater (Rs 57.31 lakh crore Vs. Rs 46.38 lakh crore). In FY 2019-20 the figure was 20% greater (Rs. 54.14 lakh crore Vs. Rs 44.92 lakh crore).

Thus in the last three years, banks have been lending to the consumption economy at an increasingly greater rate than to the producing economy.

Trend and Progress of Banking in India 2021-22 report by the Reserve Bank of India, released in December 2022, please click here to access
MSME Loan approval rates muted despite 2-fold increase in funding: Hindu Businessline  please click here to access
RBI’s concerns on slow deposit growth: The Hindu  please click here to access
Bullish on India story, but banks not helping MSME sector: The Week  please click here to access
Raghuram Rajan cautions Indian Banks on aggressive retail lending:  please click here to access
First Advance Estimates on National Income 2022-23: Ministry of Statistics and Programme Implementation  please click here to access

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