E
CO
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COPE
Credit growth weakens to 5-year low in 2QFY20
Expect industrial real GVA to post its first decline since FY13
25 November 2019
The Economy Observer
In 2QFY20, bank credit growth weakened to 8.1% YoY from 11-12% YoY seen in the past many quarters. However, as
banks currently account for only ~56% of the total debt to the non-government non-financial (NGNF) sector in the Indian
economy, an analysis of NGNF debt based only on this traditional sector does not provide a complete picture. Therefore,
we have prepared a quarterly estimate of NGNF debt in the country, which includes the five sources of non-banking
lenders, namely, non-banking finance companies (NBFCs), housing finance companies (HFCs), corporate bonds (CBs),
commercial paper (CP) and external commercial borrowings (ECBs).
After adjusting for the inter-financial transactions, our estimates suggest that NGNF debt grew 9.3% YoY in 2QFY20,
marking the slowest growth in almost five years. It, however, stayed high at ~80% of GDP in 2QFY20. Slower growth by
banks, NBFCs, HFCs and CPs explain the low credit growth last quarter, which was only partly offset by bonds and ECBs.
Further, while household debt continued to grow at robust >15% YoY, non-financial corporate (NFCs) debt increased only
5.4% YoY in 2QFY20, marking the slowest growth in at least eight years. Thus, household debt has moved to record high
of 33.6% of GDP, while NFC debt was at 13-quarter low of 46.8% of GDP last quarter.
Overall, these trends confirm a drastic slowdown in industrial activity in 2QFY20. Consequently, we believe that
industrial real GVA will post its first decline in 2QFY20 since FY13 and real investments will also decline for the first time
in five years. Real GVA/GDP growth, thus, is expected to weaken further to 4.3%/4.5% YoY in 2QFY20 vis-à-vis ~5% in
1QFY20.
NGNF credit grew 11.5%
YoY in 1QFY20, and slowed
to 9.3% in 2QFY20, marking
its first sub-10% growth in
five years
NGNF credit growth weakens to 5-year low in 2QFY20
From an average 13% growth during the four years between FY16-19, total credit to
India’s NGNF sector grew 11.5% YoY in 1QFY20, and further slowed to 9.3% in
2QFY20, marking its first sub-10% growth in five years and the second-slowest
growth in seven years (since quarterly data is available) (Exhibit
1).
Adjusting for
inflation, NGNF’s real debt grew at 4-year low of 5.7% in 2QFY20, as compared to
above-9% growth in the previous two years. Further, with our estimate of ~7% YoY
growth in nominal GDP, the NGNF debt-to-GDP ratio was still at a strong level of
80.3% in 2QFY20, only marginally lower than the record 80.8% at end-FY19
(Exhibit
2).
Exhibit 2:
…but NGNF debt-to-GDP ratio stayed high at
above-80%
NGNF debt-to-GDP ratio (%)
Exhibit 1:
India’s NGNF debt grew at 5-year low of 9.3% YoY
in 2QFY20…
20
(% YoY)
15
10
5
0
2QFY15
NGNF nominal debt
NGNF real debt
9.3
5.7
2QFY16
2QFY17
2QFY18
2QFY19
2QFY20
2QFY15
2QFY16
2QFY17
2QFY18
2QFY19
2QFY20
Please see Appendix at end of the report for methodology
Source: RBI, NHB, CSO, NBFCs/HFCs company reports, CEIC, MOFSL
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
Yaswi Agarwal
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
NGNF credit by non-bank
lenders – which accounts
for ~44% of total NGNF
debt – grew 11% YoY in
2QFY20, almost half of
>20% growth seen a year
ago and the slowest growth
in the past 21 quarters.
Massive slowdown in banks/NBFCs/HFCs/CPs only partly offset by bonds/ECBs
A detailed lender-wise analysis suggests that lending growth has decelerated for
most segments with the maximum weakness being witnessed in HFCs
(Exhibit 3).
Bank credit to the NGNF sector grew at 4-year low of 8.1% YoY in 2QFY20, NBFC
credit also weakened but still showed decent growth at 2-year lowest rate of ~15%
YoY. On the other hand, HFC loan growth has almost collapsed from ~25% YoY a
year ago to sub-6% last quarter, while CPs also declined, primarily due to the base
effect. Further, the share of bank loans going to the other financial sector (including
NBFCs/HFCs) is expected to have risen from ~7% at end-FY18 to ~10% in Mar’19 and
further to 11.3% in the quarter ending Sep’19. Such widespread deceleration was
only partly offset by corporate bonds, which posted 9-quarter highest growth of
18.3% YoY and 3-quarter high growth of 8% in ECBs. Overall, NGNF credit by non-
bank lenders – which accounts for ~44% of total NGNF debt – grew 11% YoY in
2QFY20, almost half of >20% growth seen a year ago and the slowest growth in the
past 21 quarters.
INR billion
FY17
FY18
73,868
80,468
14,800
17,643
8,185
10,386
12,639
14,478
1,827
1,122
9,243
11,910
120,563
136,008
22,985
28,029
97,577
107,978
46,695
55,540
% YoY
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
10.9
9.9
9.3
8.6
8.1
25.5
27.0
27.8
26.0
20.3
23.5
15.8
12.1
9.3
5.6
7.2
15.9
17.7
11.0
18.3
55.1
114.9
122.1
79.0
(14.1)
18.6
11.7
5.7
7.1
8.0
14.8
14.5
13.4
12.1
10.1
24.8
22.9
22.0
19.8
15.0
12.3
12.3
11.2
10.0
8.7
20.3
20.5
18.2
15.4
10.9
#Excludes corporate bonds issued by NBFCs and banks
^ Excluding FIIs investments in corporate bonds
Source: RBI, CEIC, MOFSL
Exhibit 3:
Credit growth slowdown was widespread in 2QFY20
FY16
Banks*
67,423
NBFCs
13,118
HFCs
6,811
Corporate bonds#
10,816
Commercial Paper@
1,050
ECBs^
9,139
Total
108,358
Memo: NBFCs + HFCs
19,929
Total excl NBFCs + HFCs
88,429
Non-bank lenders
40,935
*Excludes loans to the financial sector
@Excludes commercial paper issued by NBFCs
FY19
87,945
22,543
11,648
17,047
2,491
12,588
154,262
34,190
120,071
65,624
On an incremental basis,
total credit to the NGNF
sector almost halved from
INR8.7t in 1HFY19 to
INR4.7t in 1HFY20.
On an incremental basis, total credit to the NGNF sector almost halved from INR8.7t
in 1HFY19 to INR4.7t in 1HFY20
(Exhibit 4).
Over the past five years, this is the first
decline witnessed by the economy during the first half of a year. Moreover, the
dominance of banks has reduced consistently in NGNF debt during the past many
years from more than three-fourth in FY05 to 56.4% in 1HFY20
(Exhibit 5).
The share
of NBFCs, HFCs and ECBs has risen gradually.
Exhibit 5:
Dominance of banks has declined consistently in
India’s NGNF credit
(%)
8.7
8.2
5.0
11.0
Exhibit 4:
Incremental credit flow to the NGNF sector has
halved in 1HFY20
Banks
(INRb)
5,543
3,883
829
534
1,218
1,302
988
2,126
1,897
533
3,023
2,073
NBFCs+HFCs
CPs+ECBs
133
8,730
Bonds
Total
Banks
8.3
8.2
5.3
11.3
NBFCs
8.5
8.7
5.9
11.6
HFCs
8.4
10.0
6.3
12.1
Bonds
7.7
10.5
6.8
12.3
8.8
10.6
7.6
13.0
CPs
8.2
11.1
7.6
14.2
ECBs
8.7
10.9
7.5
14.4
3,501
4,662
244
1,948
1,152
1,317
66.9
66.8
64.6
62.2
61.3
59.2
57.3
56.4
1HFY17
1HFY18
1HFY19
1HFY20
FY13
FY14
FY15
FY16
FY17
FY18
FY19 2QFY20
Source: RBI, CEIC, MOFSL
25 November 2019
2
 Motilal Oswal Financial Services
Almost the entire slowdown was led by corporate credit
Although the share of banks in total NGNF debt has declined sharply to 56.4% in
1HFY20, it still accounts for almost 78% of household debt in the country. Using the
monthly details on SCBs’ sectoral credit data published by the RBI, we found that
agricultural and personal loans together account for ~70% of total loans given to the
household sector by banks. Using these ratios, we have divided NGNF debt into the
household sector and non-financial corporate (NFC) sector.
Household debt grew at
strong 15.3% YoY in
2QFY20, while NFC debt
showed record-low growth
of 5.4% YoY last quarter.
These estimates suggest that the sharp credit growth slowdown in 2QFY20 can be
almost entirely attributed to the corporate sector, as household debt continued to
post strong growth
(Exhibit 6).
Household debt in the country grew 15.3% YoY in
2QFY20, similar to the growth seen in the previous quarters, while NFC debt showed
record-low growth (since FY13) of 5.4% YoY last quarter.
Exhibit 7:
…which has de-leveraged very slowly during the
past many years
(% of GDP)
Household debt
Corporate debt
Exhibit 6:
Credit growth slowdown can be entirely
attributed to the NFC sector…
20
(% YoY)
15
10
5
0
2QFY15
Household debt
Corporate debt
15.3
5.4
2QFY16
2QFY17
2QFY18
2QFY19
2QFY20
2QFY16
2QFY17
2QFY18
2QFY19
2QFY20
Source: RBI, NHB, CSO, NBFCs/HFCs company reports, CEIC, MOFSL
Household debt has risen to
record high of 33.6% of GDP
in 2QFY20, while NFC debt
has declined from its peak
of 49% at end-FY16 to
46.8% of GDP in 2QFY20.
Not surprising then – while household debt has risen to record high of 33.6% of GDP
in 2QFY20 (up from 30% two years ago) – NFC debt has declined from its peak of
49% at end-FY16 to 46.8% of GDP in 2QFY20
(Exhibit 7).
The de-leveraging by the
corporate sector has been much slower than the higher leverage by households.
Therefore, total debt of the NGNF sector has increased gradually during the past
many years
(Exhibit 2 on the first page).
Conclusion: Industrial activity has likely declined in 2QFY20, pulling real GDP/GVA
growth to ~4.5%
Overall, credit growth has weakened markedly in 1HFY20. While from a lender’s
perspective the growth slowdown is broad-based, almost the entire deceleration
can be attributed to the corporate sector since household debt has continued its
strong growth even in 2QFY20. Thus, these trends confirm a drastic slowdown in
industrial activity in 2QFY20 – also evident from the index of industrial production
(IIP) data. Consequently, we believe that industrial real GVA will post its first decline
(since FY13) in 2QFY20 and real investments will also decline for the first time in five
years. Real GVA/GDP growth, thus, is expected to weaken further to 4.3%/4.5% YoY
in 2QFY20 vis-à-vis ~5% in 1QFY20.
We believe that industrial
real GVA will post its first
decline since FY13 and real
investments will decline for
the first time in five years in
2QFY20.
25 November 2019
3
 Motilal Oswal Financial Services
Appendix: Estimation of total debt of India’s non-
government non-financial (NGNF) sector
Scheduled commercial banks (SCBs), non-banking financial institutions (NBFCs) and
housing finance companies (HFCs) are the three major institutional sources of
lending available to households and the corporate sector (which together constitute
the NGNF sector). Consequently, we use loans and advances data from these
financial companies to estimate total debt of the NGNF sector. Apart from these
three sources, the NGNF sector borrows through commercial papers (CPs),
corporate bonds (CBs) and external commercial borrowings (ECBs). We gather data
on all these six relevant parameters, making suitable adjustments to avoid double
counting. Given below are the details:
Loans and advances of SCBs, excluding their lending to the financial sector.
Loan book of NBFCs available from the RBI’s annual publication titled ‘Report on
trend and progress of banking in India’. The bi-annual ‘Financial Stability Report’
published by the RBI provides information up to FY19. For quarterly data beyond
FY19, we have compiled data of 19 individual NBFC companies, which account
for about two-third of the entire industry (list of NBFCs is provided below).
Outstanding loan book of HFCs is available with the National Housing Bank
(NHB) up to FY18. For FY19 and quarterly data, we have used our sample of 10
HFCs, which account for ~80% of the entire industry (list of HFCs in the table
below).
Outstanding corporate bonds adjusted for debentures issued by NBFCs, HFCs
and tier-II capital of SCBs (assumed @2% of banks’ loan book).
Outstanding CPs, adjusted for NBFC issuances.
Long-term and short-term external debt (ECBs + INR debt) raised by the NGNF
sector, adjusted for foreign institutional investors’ (FIIs) exposure in corporate
bonds.
In order to arrive at the
quarterly estimates of NGNF debt,
we have used company-
level data of 19 NBFCs and 10 HFCs, which account for more than ~66% and ~80% of
the entire industry, respectively. The list of these companies is provided below:
Exhibit 8:
List of 19 NBFCs and 10 HFCs used for quarterly analysis:
1. Bajaj Finance
2. Cholamandalam
3. Edelweiss
4. IIFL Finance
5. HUDCO
6. JM Financial
7. L&T Financial
8. Mahindra & Mahindra Finance
9. Magma Finance
10. Mannapuram
11. Muthoot
12. Reliance Capital
13. Shriram City Union
14. Shriram Transport Finance
15. Sundaram Finance
16. Power Finance
17. REC Ltd.
18. Piramal Finance
19. Aditya Birla capital
20. HDFC Ltd.
21. LIC Housing
22. Indiabulls Housing
23. Dewan Housing
24. Sundaram BnP Finance
25. PnB Housing Finance
26. Canfin
27. GRUH Finance
28. REPCO Finance
29. Reliance Home Finance
25 November 2019
4
 Motilal Oswal Financial Services
METHODOLOGY USED FOR ESTIMATING TOTAL DEBT IN THE COUNTRY
Scheduled
commercial
banks (SCBs)
HOUSEHOLDS (HH)
Non-banking
financial
companies
(NBFCs)
Housing
finance
companies
(HFCs)
NON-FINANCIAL
CORPORATE SECTOR
Corporate
bonds
TOTAL
NON-
FINANCIAL
DEBT
Commercial
papers (CPs)
External
sector
GENERAL
GOVERNMENT
(CENTER + STATES)
Others*(RBI,
corporate
sector, etc.)
25 November 2019
5
 Motilal Oswal Financial Services
NOTES
25 November 2019
6
 Motilal Oswal Financial Services
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Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
*In
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days take appropriate measures to make the recommendation consistent with the investment rating legend.
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express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this
document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior
notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their
directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They
may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities
functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of
information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or may not
subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to
any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of
or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOFSL to any
registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in
whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall
be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees to exempt MOFSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not
to hold MOFSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses,
costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263; Website
www.motilaloswal.com.
CIN No.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad(West), Mumbai- 400 064. Tel No: 022
7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412. AMFI:
ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579 ;PMS:INP000006712. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration
No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond,
NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a group company of MOFSL. Private Equity is offered
through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL. Research & Advisory services is backed by proper research. Please read the Risk
Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in securities market is subject to market risk,
read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOFSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company
Law Tribunal, Mumbai Bench.
25 November 2019
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