Bank credit drawdown increases even if interest rates rise: services in the lead

The drawdown of credit in the banking system is showing signs of recovery at a time when interest rates are rising. The year-on-year bank credit growth rate crossed the 12% level to reach 12.1% as of May 20, 2022, compared to 6% growth in the same period last year, according to the latest data from the Reserve Bank.

In absolute figures, bank credit increased by Rs 13 lakh crore as of May 20 to Rs 120.27 lakh crore, from Rs 6.08 lakh crore a year ago.

Bank credit to the service sector and the personal loan segment grew faster than the other segments. While credit drawdown by the services sector increased by more than Rs 3 lakh crore, the personal loans segment, which includes housing, vehicles and credit cards, increased by more than 3.4 lakh crore .

“The drawdown of bank credit has gradually improved over the past few months, supported by both the resilience of the banking system and the gradual normalization of economic activity,” RBI Governor Shaktikanta Das said during the meeting. the unveiling of monetary policy last week. The RBI has raised the repo rate by 90 basis points since May this year, making borrowing via the repo-linked lending rate (RLLR) more costly for borrowers. However, credit growth may be slowed if the economy does not improve and the government and industry’s investment plan slows, a bank official said.

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This (credit growth) was driven by the low base effect, the shift to bank borrowing due to high capital market rates, the sustained increase in retail lending and the increase in working capital requirements in due to high inflation, according to CareEdge. Retail trade growth was relatively strong due to improving labor market and economic activities.

After modest credit growth in recent years, the outlook for bank credit growth is expected to remain positive due to economic expansion, increased public and private investment spending, rising commodity prices and of the surge in retail credit. “The medium-term outlook looks promising with reduced corporate stress and a significant cushion of provisions. CPI inflation is also on the rise, which should help credit growth,” he said.

On the flip side, rising rates could offset that growth to some extent by dampening demand for credit, CareEdge said. The retail lending segment is expected to perform well against the industrial and service segments.

Explain

Positive view

After modest credit growth in recent years, the outlook for bank credit growth is expected to remain positive due to economic expansion, increased public and private investment spending, rising commodity prices and of the surge in retail credit.

The ongoing Russian-Ukrainian war is expected to have a limited impact on credit growth in India. Meanwhile, any subsequent variant of Covid-19, if severe, could lead to lockdowns and cause the economy to slow down.

With the introduction of the benchmark external lending rate, the transmission rate will be faster and higher.

On top of that, deposits in the banking system have already started to rise from extremely low levels, and this will again be passed on to a higher MCLR for wholesale lending.

“The sensitivity of the interest rate to aggregate demand has increased significantly. Therefore, a faster and higher transmission of interest rates could become costly for some borrowers. The situation will get worse if real income does not improve,” says a report from India Ratings.

On the other hand, deposit growth remained sluggish at 9.3% (Rs 14.07 lakh crore) as of May 20 this year, from 9.7% a year ago, even as interest rates interest began to increase.