Behind rural slowdown: Credit shows uptick, but still trailing in farm sector

An uptick in the economy is clear from the improvement in gross bank credit availability but unlike in the past, lending to the priority sector continues to trail, posting single-digit growth rates over the last 18 months. This, possibly, explains the continued sluggishness in growth in rural areas post-demonetisation and implementation of GST.

Data collated from the Reserve Bank of India (RBI) over the last five years shows that growth in credit outstanding for the priority sector has traditionally been rising at a much faster rate than the growth in gross bank credit. But the last 18 months — June 2017 to November 2018 — have been an exception. In fact, in November 2018, bank credit outstanding to the priority sector rose 8.4 per cent, much slower than the gross bank credit growth of 13.6 per cent.

Priority sector refers to segments such as agriculture and allied activities, micro and small enterprises, housing for poor, students’ education and other low-income groups and weaker sections, for which the RBI requires banks to set aside 40 per cent of their lending. This is meant to ensure overall development of the economy.

Even within the priority sector, while the growth rate of credit outstanding has clawed back to over 8 per cent, that for agriculture and allied activities continues to be well below the double-digit growth rates clocked pre-demonetisation.

Much of the recovery in priority sector lending has been a result of a sharp rise in lending to the services category in the micro and small enterprises segment.

In the last 18 months, growth in priority sector credit varied between a low of 3.3 per cent in July 2017 and a high of 9.3 per cent in October 2018. During the same period, the gross bank credit registered the lowest rate of 4.4 per cent in June 2017 and the highest of 13.6 per cent in November 2018.

According to RBI data, loan growth for the priority sector at the end of October and November 2018 stood at 9.3 per cent and 8.4 per cent, respectively. In October 2016, it was around 8.3 per cent. However, agri and allied activities witnessed loan growth of 7.5 per cent in November 2018, much lower than 15.4 per cent and 12.8 per cent, respectively, in September and October 2016.

The MSEs, on the other hand, have seen a rise in bank lending by 12.3 and 11.2 per cent in October and November 2018, respectively, primarily driven by a jump in lending to the services segment.

If the manufacturing segment within MSEs saw lending growth of 1.1 per cent in November 2018, the services industry saw it expand by 18 per cent in the same month. In fact, a month earlier in October, bank lending to services stood at a high of 19.6 per cent.

This growth is in sharp contrast to the contraction in credit outstanding that the services segment saw in September and October 2016, just before the demonetisation announcement. The bank lending to the services segment contracted by 1.5 per cent and 8.9 per cent in the two months.

The two-year credit outstanding data also reveals that while bank lending to the priority sector, which collapsed post-demonetisation, witnessed a recovery after a year on the back of enhanced lending to the farm segment and the manufacturing players within the MSE segment, it started slowing on account of a dip in lending to agri and manufacturing over the following months.

The manufacturing segment has seen one of the weakest growth rates among the key segments of priority sector lending and the credit outstanding to the segment has grown at a compounded annual growth rate (CAGR) of just 2.8 per cent between November 2016 and November 2018. In comparison, the services sector has grown at a CAGR of 15.2 per cent during the same period.