Bank credit growth in India is expected to accelerate in FY23. However, inflation and rising interest rates could be the main headwinds negatively impacting the growth rate, Care Rating said in a report. After modest credit growth in recent years, the outlook for bank credit drawdown is positive due to economic expansion following nominal GDP growth, rising public and private investment spending, rising commodity prices raw materials, the implementation of the PLI program and the extension of the ECLGS for MSMEs and the push for retail credit, according to the research firm.
Analysts believe the medium-term outlook for bank credit growth looks promising with easing corporate stress and a substantial cushion for provisions. They estimate credit growth will be between 12% and 13% in FY23, but inflation and rate hikes could negatively impact credit growth.
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Bank credit growth continues to accelerate
According to the Care Ratings report, credit drawdown continued to register increased growth at 15.3% year on year, increasing by a significant 980 basis points, for the fortnight ended August 12, 2022, against 5.5% it a year ago and growing. sequentially by 0.5% from the immediate fortnight. In absolute terms, outstanding credit stood at Rs 124.3 lakh crore, increasing by Rs 16.5 lakh crore year on year. “A weak base, small loan sizes, working capital requirements and a shift to bank borrowing due to high capital market yields continue to drive growth,” the research firm said.
Small loans, credit card receivables, home loans, auto loans and consumer durable loans continue to represent personal credit growth in the sector. Apart from personal loans, driven by the miniaturization of credit, the main driver of this growth has been the MSME segment. This segment has driven double-digit growth in wholesale credit reports after experiencing a significant slowdown last year, according to the Care Ratings report.
Meanwhile, CPI inflation eased to a five-month low of 6.71% in July due to lower prices for edible oils and vegetables. However, it has remained above the 6% mark for several months. As a result, RBI has already raised the repo rate several times in FY23. In addition, the benchmark 10-year G-Sec yield has risen from 6.79% as of March 31 to 7.29 % as of July 31, 2022, leading to higher borrowing costs in the market. In addition, banks have also increased their lending rates.
Bank deposit growth trajectory flattens
Bank deposits stood at Rs 169.5 lakh crore for the fortnight ended August 12, 2022, registering a year-on-year growth of 8.9%. Meanwhile, in absolute terms, bank deposits grew by Rs 13.8 lakh crore over the past 12 months. However, deposits decreased by 1% compared to the immediately preceding fortnight. Time deposits increased by 9.1% on an annual basis, while demand deposits increased by 10.3% during the reference fortnight, compared to growth of 9% and 22.6% respectively over the period. one year, reported during the fortnight ending August 13, 2021, according to the report.
Analysts say the banking system has maintained excess liquidity since the early months of FY20 due to faster accumulation of deposits relative to credit disbursement, but this trend has reversed in recent months. month. Currently, liquidity is generally trending lower as RBI seeks to reduce excess liquidity in the system to manage inflation. This is also reflected in an increase in short-term funding through certificates of deposit (CDs) by banks. The research firm predicts that the increase in the deposit rate would begin to accelerate given that credit growth has accelerated and liquidity is shrinking in the banking sector.
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The CD ratio increases
Meanwhile, the credit-to-deposit (CD) ratio, which has been rising since October 2021, stood at 73.3%, up 411 basis points year on year from the similar fortnight last year. and 40 basis points over the immediate fortnight, due to faster growth in credit compared to deposits. Assuming credit investments are at Rs. 7.97 lakh crore for the fortnight ending August 12, the CD ratio would be around 78%, up from 69.2% in the similar fortnight last year in due to higher credit growth and was tempered by lower investment.