Interest rates may have increased at a fast clip over the last year, but that hasn't dented the appetite for loans. In fact in the 2022-23 financial year, credit offtake hit a 11 year high, growing 15 per cent, according to data from ratings agency CARE.
For the fortnight ended March 2023, credit offtake rose 15 per cent year-on-year, versus 9.6 per cent from the same period in the last year, the data from CARE shows.
In absolute terms, credit outstanding stood at Rs 136.8 lakh crore as of March 24, 2023, rising by Rs.17.8 lakh crore from March 2022.
This growth comes even as the Reserve Bank has raised the repo rate (the rate at which it lends money to commercial banks) to 6.50 per cent from 4.0 per cent last May. Geopolitical concerns in the backdrop of the Russian invasion of Ukraine and supply-side issues too haven't dented the appetite much.
Whats driving this credit offtake?
"The credit growth has been robust in FY23 driven by lower base of the last year, unsecured personal loans, housing loans, auto loans, higher demand from NBFCs, higher working capital requirements due to elevated inflation from select industries and depreciation of Indian Rupee," said analysts at CARE.
While the demand has been broad-based, personal loans and demand from non-banking finance companies (NBFC) have been the key driver, they added.
In the current financial year ending March 2024, credit offtake could slow and be in sync with the GDP growth as rising interest rates slows global economic growth.
The World Bank recently lowered its GDP forecast for India for 2023-24 to 6.3 per cent from 6.6 per cent. The RBI has forecast a GDP growth of 6.5 per cent for this year.
Any further interest rate hikes in India could also impact credit offtake, according to the CARE analysis.
The higher interest that banks charge on loans, compared with the interest they pay on deposits, is a primary source of income for lenders. The robust credit growth over the past year has driven profits. However, deposit growth has lagged significantly to credit growth.
For instance, for the fortnight ended March 24, deposit growth was at 9.6 per cent, versus 15 per cent loan growth. In absolute terms, deposits stood at Rs 180.4 lakh crore for the fortnight ended March 24, 2023.
This is leading to intense competition among the banks to raise interest rates on deposits.
"With liability franchise gaining importance, due to a high credit-deposit growth gap, bank deposits rates have risen, and deposit growth would continue to be monitored," according to CARE analysts.
Credit growth generally began picking up in second half of 2021-22 financial year and surpassed deposit growth in January-March 2022, said CARE. Since then it has continued the momentum.
With deposit growth lagging credit growth, banks have partly met the funding gap by mobilising Certificate of Deposits (CDs). A CD is a fixed income instrument issued against funds deposited in a bank for a specific period. These are governed by Reserve Bank of India and the commercial bank will pay interest on it based on the deposit duration and amount.
The outstanding CDs stood at Rs 3.0 lakh crores as of March 24, 2023, compared with Rs.1.5 lakh crore a year ago, according to the CARE analysis.
"Banks are keeping their CD issuance elevated to meet short-term requirement amid lower liquidity and focusing on shoring up the deposits to meet robust credit demand."