Personal finance on the rise

With each passing month, it is increasingly becoming evident that this year’s private sector credit supply will be lower than the last. The latest central bank data says that loans to private businesses fell about 37 percent year-on-year in the first eight months of current fiscal year. Specifically, it dropped to Rs164 billion in 8MFY15 from Rs259 billion in the same period last year.
The major sectors responsible for this decline are the usual suspects, discussed in previous months’ coverage of credit off take in these columns. These include food and beverages, textiles, as well as businesses involved in commerce and trade.
Things haven’t improved even after monetary easing began November 2014 onwards. Many of these sectors have their own seasonal credit cycles. However, a look at data comparing net credit off take during December 2014 and February 2015 (i.e. months after monetary easing) with the same Dec-Feb last fiscal year also shows that rate cut hasn’t had an impact on credit off take to most of these sectors.
This is plausibly because – as we had mentioned in our last month’s column – banks are still hesitant to lend to private sector, notably the smaller players. The central bank had theorized the same in its first quarterly report earlier this fiscal year.
The one trend that is becoming quite apparent between then and now is the rise in personal financing. According to central bank data, personal financing has not only increased in 8MFY15 (up 9 percent year-on-year); the impact of discount rate cuts is also becoming visible.
Personal loans – that have not historically followed any visible seasonal pattern - accounted for 12 percent of total net lending to private sector in 8MFY15 as against 7.2 percent in the same period last year and 5.7 percent in 8MFY13. A bulk of this year’s credit growth under this category comes from staff loans taken by bank employees, followed by consumer financing for transport, such as cars, and also personal loans.
It would be interesting to see if banks continue raising their stakes in personal loans without doing the same for private businesses.