MUMBAI: Bank credit is seen growing 11–12% this fiscal after a slower first half (around 10%), owing to government and regulatory support, and a pick-up in consumption in the second half, primarily driven by the GST rate cuts that will take effect from next Monday.
In a report, Crisil Ratings said Monday, if it does indeed grow at 11-12% that will be a notch higher than the last fiscal and above the decadal average growth as well.
Retail credit will gain the most and drive the overall credit growth, while other segments will be largely range-bound, the report said, adding that the lingering global uncertainties could affect these estimates.
Bank credit growth in the first quarter was muted at 10.3% because of a slower-than-expected revival in retail demand, continuing caution on unsecured lending and substitution by corporate bonds stemming from faster transmission of the repo rate cuts in the market.
In the second half, however, credit growth is expected to pick up as the composite effect of government and regulatory stimuli plays out, the report notes.
Deposit growth, a crucial factor for sustainable credit growth, is seen as adequate for the expected uptick in credit, aided by the Reserve Bank measures to enhance systemic liquidity, including a four-phased cash reserve ratio reduction and revision in the liquidity coverage ratio norms.
The first phase of the release of CRR to the tune of around Rs 65,000 crore has already happened. Other measures, such as a reduction in risk weights on bank loans to non-banks and clarity on project financing guidelines, are helpful as well.
According to Krishnan Sitaraman, chief ratings officer at Crisil Ratings, retail credit, which comprises 33% of bank loans, is expected to grow higher at 13% this fiscal from 11.7% in last fiscal.
The reduction in the goods and services tax rates should also boost consumption, spurring retail credit demand. Lower interest rates, benign inflation (the price index printed in August at 2.10%, which is marginally higher than 1.51% in July) and the income tax cuts are spurs, too.
Within the retail segment, unsecured loans are expected to see faster growth, fueled by consumption uptick and the statistical low-base effect of last fiscal, he said, adding that the better performance of newer unsecured portfolios, which have benefited from stricter underwriting standards introduced by lenders, should be a growth positive.
At 50%, home loans remain the largest constituent of retail credit and growth here will benefit from lower interest rates.
While gold loans are a relatively small proportion of the retail portfolio, the segment has expanded rapidly and its growth will continue to be robust.
Credit growth in the corporate sector, which accounts for 38% of bank loans, is expected to be marginally lower at 9% this fiscal compared to 9.7% last fiscal, weighed down by a sluggish first quarter.
Of the Rs 171-trillion corporate credit pie, banks account for 40%, while capital markets contribute to over a third. According to Ajit Velonie, a senior director with Crisil, there was over 60% spurt in corporate bond issuances in Q1 because of the faster transmission of repo rate cuts compared to bank rates.
This has had an impact on bank credit to corporates, which grew just 3.8% on-year till July. As the repo rate cuts cascade to banks’ lending rates, there could be some reversal of the substitution by the corporate bond market.
Bank lending to non-banks is also expected to pick up in the second half on the back of the rollback of higher risk weights on exposures in this segment and the lower base of last fiscal.
Downstream demand from the ongoing infrastructure buildout, which will continue to drive investments in the cement, primary steel and aluminium sectors, will also help. Reliance on own funds by corporates (they are sitting over Rs 13.5 trillion of cash, according to SBI chairman), equity raising for planned spends and tariff-related uncertainties leading to postponement of capex as well as any future policy rate cuts that could prolong corporate bond market substitution, will bear watching.
Lending to small businesses, which constitutes 17% of the overall credit is seen steady at 14% this fiscal. Better addressability of the segment through digitalisation and formalisation, as well as democratisation of data, and improved risk-adjusted returns have drawn banks towards this segment.
However, banks are likely to exercise caution in some sub-segments including export-oriented units.Agricultural credit growth is also seen reasonable at 10% this fiscal, supported by another season of adequate rains and its positive rub-off on harvest.
Overall, while there are some tailwinds to lift credit growth somewhat this fiscal, the evolving external environment could pose downside risks to overall economic growth, which in turn could dampen bank credit demand, the report concluded.