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CO
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COPE
Credit growth weakens further in 3QFY20
Negligible growth in real credit
25 February 2020
The Economy Observer
Banks’ non-food credit growth moderated to 7% YoY in Dec’19, marking slowest growth in two years. However, our
estimates of India’s non-government non-financial (NGNF) debt – of which banks account for only ~56% – suggest that
NGNF debt grew only 6.2% YoY in 3QFY20, lower than 6.8% growth in the previous quarter and marking slowest growth
in the past two decades. It slowed to the two-year lowest level of 81% of GDP in 3QFY20. Adjusted for headline inflation,
real debt growth was marginal at only 0.3% YoY in 3QFY20, the lowest in a decade.
NGNF credit growth slowdown was broad-based, albeit largely driven by banks, NBFCs, HFCs, corporate bonds and
commercial paper, while external commercial borrowings (ECBs) are expected to have grown faster. Excluding NBFCs and
HFCs, NHGNF growth was even slower at a record-low of 5.4% YoY in 3QFY20.
Further, while household debt growth moderated to a five-year low of 8.7% YoY, non-financial corporate (NFCs) debt
growth was stable at a record-low 4.3% YoY in 3QFY20. Thus, household debt inched up from 34.4% of GDP a year ago to
34.8% in 3QFY20, but NFC debt was at a 20-quarter low of 46.2% of GDP last quarter.
Overall, these trends confirm that credit growth weakened further in 3QFY20, supporting our
expectation
of lower real
GDP growth in the quarter. We believe that industrial real GVA will decline for the first time in 3QFY20 (since the new
data began in FY13) and real investments will also decline for the first time since FY15. Real GVA/GDP growth, thus, is
expected
to weaken further to ~4% YoY in 3QFY20.
NGNF credit growth at record low in 3QFY20
Total credit to India’s NGNF
sector grew only 6.2% in
3QFY20, marking slowest
growth in the past two
decades.
From average 13% growth over FY16-19, total credit to India’s NGNF sector grew
only 6.8% YoY in 2QFY20, which slowed further to 6.2% in 3QFY20, marking its
slowest growth in the past two decades (Exhibit
1).
Adjusting for inflation (measured
by consumer price index (CPI)), NGNF’s real debt grew at a meager 0.3% in 3QFY20,
the slowest in a decade and compared to above-9% growth in the previous four
years. Further, with our estimate of 7% growth in nominal GDP in 3QFY20, the NGNF
debt-to-GDP ratio declined further to 81% in 3QFY20, the lowest ratio in the past
nine years and as against the peak of 83.3% at end-Mar’19
(Exhibit 2).
Exhibit 2:
…and NGNF debt-to-GDP ratio weakened to nine-
quarter low of 81%
NGNF debt-to-GDP ratio (%)
Exhibit 1:
India’s NGNF debt grew at record low of 6.2% YoY
in 3QFY20…
20
(% YoY)
15
10
5
0
3QFY15
0.3
3QFY16
3QFY17
3QFY18
3QFY19
3QFY20
NGNF nominal debt
NGNF real debt
6.2
3QFY15
3QFY16
3QFY17
3QFY18
3QFY19
3QFY20
Please see Appendix at end of the report for methodology
Source: Reserve Bank of India (RBI), Central Statistics Office (CSO),
Bloomberg, 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
Massive slowdown in banks/NBFCs/HFCs/bonds, only partly offset by ECBs
Bank credit to the NGNF
sector grew at 5.7% YoY in
3QFY20, marking slowest
growth in at least the past
two decades.
A detailed lender-wise analysis suggests that lending growth has decelerated for
most segments with the maximum weakness being witnessed in banks
(Exhibit 3).
Bank credit to the NGNF sector grew at 5.7% YoY in 3QFY20, marking slowest
growth in at least the past two decades. NBFC credit growth also weakened to sub-
9% YoY in 3QFY20, only slightly higher than record-low growth of ~8% YoY posted in
1QFY17. Although HFC loan growth has weakened to single-digit and lowest in a
decade, it was broadly stable in 3QFY20.
Interestingly, while we are mostly focused on NBFCs/HFCs, the outstanding value of
corporate bonds (CBs) issued by the non-financial sector grew only 2.1% YoY in
3QFY20, slowest growth in eight years and as against very strong average growth of
~30% during the four years up to FY19.
The sharp slowdown in banks’ NGNF credit, thus, is the primary contributor to credit
growth slowdown. NGNF credit by non-bank lenders – which accounts for ~44% of
total NGNF debt – grew 6.7% YoY in 3QFY20, slightly better than 6.3% in 2QFY20.
However, excluding NBFCs/HFCs, NGNF debt growth was even lower at 5.4% last
quarter. Nevertheless, decent growth in NBFCs and HFCs would not have been
possible without the support of banks since the share of bank lending to the other
financial sector (NBFCs and HFCs in particular) has risen from 8.5% in mid-FY19 to
>10% in 3QFY20.
Outstanding value of
corporate bonds grew only
2.1% YoY in 3QFY20, the
slowest growth in eight
years.
Exhibit 3:
Credit growth slowdown was widespread in 3QFY20
FY16
Banks*
68,978
NBFCs
13,112
HFCs
6,811
Corporate bonds#
11,163
Commercial Paper@
1,269
ECBs^
10,091
Total
111,425
Memo: NBFCs + HFCs
19,923
Total excl NBFCs + HFCs
91,502
Non-bank lenders
42,447
*Excludes loans to the financial sector
@Excludes commercial paper issued by NBFCs
INR billion
FY17
FY18
73,496
79,537
14,800
19,625
8,185
10,386
14,881
16,994
2,003
1,265
10,069
12,678
123,434
140,485
22,985
30,011
100,449
110,474
49,938
60,948
FY19
88,807
22,766
11,917
19,217
2,480
13,239
158,425
34,683
123,742
69,618
% YoY
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
11.9
11.7
10.2
7.2
5.7
22.4
16.0
15.1
10.8
8.9
16.9
14.7
12.4
9.2
9.3
11.8
13.1
9.0
4.8
2.1
49.0
96.0
16.6
(15.6)
(15.0)
10.3
4.4
5.7
4.0
11.6
14.0
12.8
10.6
6.8
6.2
20.5
15.6
14.2
10.3
9.0
12.3
12.0
9.6
5.8
5.4
16.8
14.2
11.2
6.3
6.7
#Excludes corporate bonds issued by NBFCs and banks
^ Excluding FIIs investments in corporate bonds
Source: RBI, CEIC, MOFSL
On an incremental basis,
total credit to the NGNF
sector was down 71% -
from INR12.0t in 9MFY19 to
INR3.5t in 9MFY20.
On an incremental basis, total credit to the NGNF sector was down 71% - from
INR12.0t in 9MFY19 to INR3.5t in 9MFY20
(Exhibit 4).
Incremental lending by all
domestic lenders was lower than during the corresponding period in FY19; however,
ECBs’ support almost tripled from INR0.5t to INR1.4t during the period.
Further, while the share of banks in total NGNF debt has fallen consistently from
~65% five years ago to ~56% now, the share of NBFCs has risen to peak of 14.8% and
close to record-high of HFCs. Surprisingly, the share of bonds has fallen from ~12.5%
three years ago to 11.6% in 3QFY20, while it has risen marginally to 9.1% for ECBs
(Exhibit 4 on the next page).
24 February 2020
2
 Motilal Oswal Financial Services
Exhibit 4:
Incremental credit flow to NGNF sector was down
71% YoY in 9MFY20
Banks
(INRb)
NBFCs+HFCs
10,335
1,571
1,591
4,564
2,610
FY18*
5,621
CPs+ECBs
12,009
1,403
1,802
3,184
3,474
1,165
1,515
1,224
(430)
FY20*
Bonds
Total
Exhibit 5:
Dominance of banks has declined consistently in
India’s NGNF credit
(%)
Banks
9.6
7.3
5.3
12.2
NBFCs
9.4
8.0
5.7
12.0
HFCs
9.1
10.0
6.1
11.8
Bonds
8.2
12.1
6.6
12.0
CPs
9.0
12.1
7.4
14.0
56.6
ECBs
8.4
12.1
7.5
14.4
56.1
9.1
11.6
7.6
14.8
55.6
5,199
2,299
754
2,053
93
FY17*
10.3
6.9
5.0
12.0
65.2
65.2
64.0
61.9
59.5
FY19*
FY13
FY14
FY15
FY16
FY17
FY18
FY19 3QFY20
* Data for April-December period
Source: RBI, CEIC, MOFSL
Household debt moderated, while corporate debt stable at low level
Although the share of banks in total NGNF debt has declined to 55.6% in 3QFY20, it
still accounts for ~73% 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. Including bank loans to micro and small enterprises, transport
operators and trade, these sectors account for ~90% of all bank loans provided to
the household sector. Using these ratios, we have divided NGNF debt into the
household sector and non-financial corporate (NFC) sector. Household sector
accounts for 43% of total NGNF debt in the country now.
Household debt grew only
8.7% YoY in 3QFY20, while
NFC credit growth was 4.3%
in 3QFY20.
Our estimates suggest that household debt (from banks, NBFCs and HFCs) grew only
8.7% YoY in 3QFY20, marking slowest growth in five years
(Exhibit 6).
Further, while
NFC credit growth fell to a record low of 4.2% YoY in 2QFY20, it was broadly similar
at 4.3% in 3QFY20.
Exhibit 7:
…but household debt to GDP ratio was at all-time
high in 3QFY20
(% of GDP)
Household debt
Corporate debt
Exhibit 6:
Credit growth slowdown can be entirely
attributed to household sector…
25
20
15
10
5
0
Household debt
(% YoY)
NFCs debt
8.7
4.3
3QFY16
3QFY17
3QFY18
3QFY19
3QFY20
Source: RBI, NHB, CSO, NBFCs/HFCs company reports, CEIC, MOFSL
Household debt has risen to
record high of 34.8% of GDP
in 3QFY20, while NFC debt
has declined from its peak
of ~51% at end-FY16 to
46.2% of GDP in 3QFY20.
Not surprising then, while household debt has risen to a record high of 34.8% of
GDP in 3QFY20 (up from 31% three years ago), NFC debt has declined from its peak
of ~51% at end-FY16 to 46.2% of GDP in 3QFY20
(Exhibit 7),
marking the lowest level
in five years. 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
actually fallen gradually during the past few years
(Exhibit 2 on the first page).
3
24 February 2020
 Motilal Oswal Financial Services
Conclusion: First decline in industrial activity/investments to pull 3QFY20
real GVA/GDP growth to ~4%
Overall, NGNF credit has weakened markedly in FY20, with credit growth weakening
from 6.8% in 2QFY20 to 6.2% in 3QFY20. From lenders’ perspective, the growth
slowdown is broad-based, which was only partly offset by foreign borrowings. From
borrowers’ perspective, while household debt weakened to a five-year low of 8.7%
YoY, NFC debt growth was stable at a record-low of 4.3% YoY in 3QFY20.
Further weakness in credit
growth supports our view
that real GVA/GDP growth
could be ~4% YoY in
3QFY20.
Overall, credit growth weakened further in 3QFY20, supporting our
expectations
of
lower real GDP growth in the quarter. We believe that industrial real GVA will
decline for the first time in 3QFY20 (since the new data began in FY13) and real
investments will also decline for the first time since FY15. Real GVA/GDP growth,
thus, is
expected
to weaken further to ~4% YoY in 3QFY20.
24 February 2020
4
 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 and 1HFY20. For quarterly
data, we have compiled data of 18 NBFCs, which account for about three fifths
of the entire industry (list of NBFCs is provided below).
Outstanding loan book of HFCs is also now available with the RBI up to FY19 and
1HFY20. For quarterly data, we have compiled data of 11 HFCs, which account
for ~85% 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 NBFCs/HFCs 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 18 NBFCs and 11 HFCs, which account for ~60% and ~85% of the entire
industry, respectively. The list of these companies is provided below:
Exhibit 8:
List of 18 NBFCs and 11 HFCs used for quarterly analysis:
1. Bajaj Finance
2. Cholamandalam
3. Edelweiss
4. IIFL Finance
5. JM Financial
6. L&T Financial
7. Mahindra & Mahindra Finance
8. Magma Finance
9. Mannapuram
10. Muthoot
11. Reliance Capital
12. Shriram City Union
13. Shriram Transport Finance
14. Sundaram Finance
15. Power Finance
16. REC Ltd.
17. Piramal Finance
18. Aditya Birla capital
19. HDFC Ltd.
20. LIC Housing
21. Indiabulls Housing
22. Dewan Housing
23. Sundaram BnP Finance
24. PnB Housing Finance
25. Canfin
26. GRUH Finance
27. REPCO Finance
28. Reliance Home Finance
29. HUDCO
24 February 2020
5
 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.)
24 February 2020
6
 Motilal Oswal Financial Services
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and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes
investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions
expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific
recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems
necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its
own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those
involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty,
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.
24 February 2020
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