Credit demand losing sheen, may slip by 200 bps to 14% in FY25

The report added that the fundamental drivers of credit demand are broadly intact and a revival in private capex, from the second half, can provide a tailwind.
Representational image
Representational image

MUMBAI: Bank credit growth is likely to decelerate by 200 bps to 14 percent on year this fiscal primarily because of the economy losing its sheen this fiscal, partly due to a high base, says a report.

Strong economic activity and retail credit demand drove loan growth last fiscal to a robust 16 percent. This fiscal, however, growth will be tempered by the high base effect, a revision in risk weights and a slower economy.

Accordingly, overall credit demand is likely to decelerate by 200 bps to around 14 percent this fiscal, Crisil Ratings said in a report, which however quickly added that the fundamental drivers of credit demand are broadly intact and a revival in private capex, from the second half, can provide a tailwind.

On the other hand, the pace of deposit growth can keep a check on credit growth, even though the differential between the two has come down over the past year.

Within the overall credit growth, the largest segment, corporate credit, which constitutes 45 percent of bank credit, is likely to grow steady at 13 percent, while retail, which is 28 percent of bank credit and thus the second-largest segment, is expected to grow the fastest at 16 percent, according to Ajit Velonie of the agency.

Corporate credit growth will be supported by private sector industrial capex, underpinned by expectations that GDP growth will remain solid at 6.8 percent, although lower than an estimated 7.6 percent in fiscal 2024. Steel, cement and pharma will lead the capex recovery, he said, adding that emerging sectors such as electronics and semi-conductors, electric vehicles and solar modules will also contribute to the capex jump.

The pick-up in capex should offset the impact of lower growth in bank funding to non-banks on account of the 25 percentage points higher risk weight on lending to higher-rated NBFCs.

Retail credit will print a tad lower at 16 percent down from 17 percent in fiscal 2024, but will remain the fastest-growing segment. Retail will feel the drag of lower growth in unsecured consumer credit which is as much as 25 percent of retail credit as banks realign their strategies following the regulatory stipulation of additional 25 percentage points risk weight. Another reason for the slower retail growth is the absence of HDFC from the market.

Home loans remain the largest constituent of retail credit and should grow steadily, given increasing preference for home ownership and better affordability.

Demand from MSMEs which form 16 percent of overall credit, is estimated at 15 percent this fiscal, off a higher base, having expanded a robust 19 percent in fiscal 2024. This segment will be supported by a revival in downstream capex due to the benefits accruing from the productivity-linked incentive scheme, apart from their rising formalization.

Farm credit will remain linked to the monsoons but should witness a moderation on the back of a strong fiscal 2024.

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