7th Pay Commission: Credit growth to see marginal growth

Over 20 per cent rise in pay package for central government employees, is expected push the demand for retail loans over period, albeit in small way, as beneficiaries begin to buy consumer durables and decide to buy homes.

Bankers and rating agencies said the effect on retail lending will be positive but would be indirect.

The immediate benefit could be seen in loans for consumer durables and vehicles linked with demand for these items. For home loans, being big ticket item, impact would become visible later.

Banks and finance companies have been putting all efforts to hawk loans for vehicles, consumer durables and housing when the demand industrial credit has been muted for long.

According to Reserve Bank of India data the personal loans covering housing, credit cards, durables and vehicles segment rose by 19.7 per cent in 12 months till end of April 2016. This was substantial improvement over 15.7 per cent growth in one year into April 2015.

In a bonanza for over one crore government employees and pensioners, the union Cabinet today approved implementation of the 7th Pay Commission, which had recommended an overall hike of 23.5 per cent.

Ajay Srinivasan, director at CRISIL Research said the impact is expected to be indirect on credit demand and may not be very significant. Retail credit which was estimated to grow at 17-18 per cent in FY17 may expand at little faster pace of about 20 per cent on implementation of Seventh Pay Commission recommendation.

Elaborating on prospects of muted effect on credit side, Srinivasan said at the time of implementing six pay commission award the government had paid arrears.). There is no space for it now (while paying according to seventh pay panel recommendations). Plus economic environment is not optimistic at this point of time.

SBI in a research note said the recommendations are positive for the economy as they will boost consumption as well as savings through a concomitant increase in bank deposits, pension and provident funds.

This was welcome in a year when bank deposits have touched a 53-year low and there is every possibility of deposit outflow in Sep 16 because of FCNR (B) outflows, SBI said.

Outflow on account of FCNR (B) deposits maturing is pegged at $ 20 billion. With RBI giving part subvention to hedge currency risks, banks had raised about $ 34 billion in 2013. This was part of action plan to contain volatility in foreign exchange market and stem value of rupee.

According to RBI data the pace of growth in deposits of scheduled commercial banks has slowed to 9.6 per cent in 12onths ended June 2016, from 11 per cent for previous 12 months.