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Bank credit could grow by 9-10% next fiscal: CRISIL

Corporate credit, retail lending expected to contract and slow down respectively

bank-rupee-cash-rupee-cash-2000-notes-india-rbi-currency-shut Representational image

Bank credit is expected to grow at a higher pace during the next fiscal by at least 9 to 10 per cent. This is in contrast to the bank credit growth which was seen rising at around 4 to 5 per cent, despite one of the sharpest contraction in the Indian economy ever since its independence. 

As per a report by CRISIL, it was earlier expected that the bank credit would only rise by about 1 per cent, with bank credit growth in this fiscal to be between 0-1 per cent. Experts at CRISIL now say that while bank credit contracted by around 0.8 per cent in the first half of the current fiscal, it recovered in Q3 of FY21 by growing 3 per cent sequentially. 

CRISIL expects that in the fourth quarter of the current fiscal too, bank credit should clock 3 per cent sequential growth. 

Government measures, including the Rs 3 lakh crore emergency credit line guarantee scheme (ECLGS), have been supportive. During the first half of the current fiscal, the COVID-19 pandemic forced both the borrowers and lenders to tread cautiously, leading to a contraction in bank credit. An uptick in economic activity since the relaxation of lockdowns, and the pent up and festive season demand, helped thereafter. In absolute terms, net credit increased by around Rs 2.3 lakh crore in the first nine months of this fiscal. Interestingly, disbursements under ECLGS in this period was Rs 1.6 lakh crore.

However, it is expected that the bank credit growth rate will vary across different segments and sub-segments.

Interestingly corporate credit (49  per cent of the overall bank credit) growth is expected to contract this fiscal given that companies have put capex on the hold. It is expected to change during the next fiscal when corporate credit will grow at around 5 to 6 per cent led by the government’s infrastructure push and a likely revival in demand. CRISIL feels that the share of corporate loans in the overall credit pie would still continue to shrink because of the faster growth of other segments.

It is also expected that retail lending, a major driver of bank credit in the past, is expected to slow down to 9-10 per cent this fiscal before returning to the mid-teens growth of the past couple of years.

“Banks are expected to benefit from lower competition as non-banks, grappling with multiple challenges, see tepid growth. With deposit growth outstripping credit growth so far, banks would use the surplus liquidity to wrench credit market share away from some of the largest catchments of non-banks such as mortgages and new vehicle finance. Even this fiscal, more than half of the incremental retail credit growth to date has been from mortgages.” observed Subha Sri Narayanan, Director, CRISIL Ratings. 

It has been observed that lending to micro, small and medium enterprises (MSME) has been one of the fastest-growing areas for banks in the current fiscal, supported by ECLGS. Agriculture credit has also contributed, with rural India seeing a lower impact of the pandemic and a good harvest.

Credit growth here is foreseen at 6-7 per cent in both, this fiscal and next. CRISIL further observed that that economic recovery, along with a pick-up in private investment and capex demand will drive credit growth.  However, risks remain as a sub-normal monsoon and a surge in COVID-19 cases leading to localised or partial lockdowns may be detrimental to the credit growth. 

A recent report by HDFC Securities points out that non-food credit growth in the current fiscal had hit a 41-month low of 5.6 per cent, led by a broad-based slowdown in industrial and service credit and personal loan growth. However, individual pockets within the aforementioned segments and growth in agricultural credit showed signs of improving momentum. 

"Industrial credit witnessed persistent de-growth at 1.3 per cent in January 2021. At the same time, micro and small industries saw negligible growth at  90bps YoY while growth in credit to medium industries continued to surge, reaching 19.1 per cent YoY. The report also observes that growth in credit to medium industries was aided by disbursals under the ECLGS. Within industrial credit, sectors such as infrastructure (led by telecom), metals and all engineering saw persistent YoY de-growth. Experts at HDFC Securities feel that other segments such as textiles and gems and jewellery saw an improvement in their growth trajectory,"  remarked  Krishnan ASV, Institutional Research Analyst, HDFC Securities.

He also points out that the YoY growth in personal loans slowed for the second consecutive month, after a spurt in November 2020 reaching a 10 year low of 9.1 per cent. This sluggishness was broad-based. Home loan growth too slowed to 7.7 per cent YoY (the slowest in the last 129 months) and the vehicle loan growth decelerated slightly to 7.1 YoY.

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