Bank credit growth hits three-year high of 13.1%, RBI data shows

Bank credit rose 13.1% year-on-year (YoY) in the fortnight ended June 3, the highest in three years, according to the latest data released by the Reserve Bank of India (RBI). Bank credit growth over the previous year was 5.7%.

At an event on Friday, Reserve Bank of India (RBI) Governor Shaktikanta Das said, “We are seeing reasonably good credit drawdowns. It is around 12% year-on-year, according to the latest data. Last year, around this time, credit growth was 5-6%.

During the fortnight, banks extended additional credit of Rs 1.02 trillion, bringing outstanding loans to Rs 121.40 trillion. Credit growth was even higher in April 2019, when it increased by 14.19%. The rise comes amid a hike in lending rates.

“There are several factors to this. For businesses, working capital requirements, which had dropped during the pandemic, are normalizing and to this extent working capital utilization is improving,” said Prakash Agarwal, Director and Head (Financial Institutions) from India Ratings.

“At the same time, non-bank credit, which had been weak last year, has picked up considerably. In retail, credit growth was strongly supported by robust growth in home loans and consumer loans as banks became more proactive in this segment following the onset of Covid. We expect some foreign borrowing maturing in the current year to be refinanced by domestic sources, primarily banks, as refinancing conditions tighten overseas. These factors should support short-term credit demand,” Agarwal said.

Prashant Kumar, Managing Director and CEO of YES Bank, said borrowers, especially corporates, could borrow in the markets and overseas, but raising funds in the markets had become more expensive than bank loans. Therefore, companies turned to banks. Moreover, very little money comes from abroad. As for drawing credit to keep up the pace, he said that would depend on how inflation affects demand in the economy.

During the same period, bank deposits increased by 1.59 trillion rupees, bringing the total to 167.33 trillion rupees. On an annual basis, the growth of deposits in the banking system is 9.3%.

As of May 20, credit growth was 12.1% year-on-year, more than double the 6% recorded a year ago.

Bank credit in the system is growing by double digits amid rising interest rates, with the RBI raising the repo rate by 90 basis points in about a month to fight inflation.

After the rate hikes, lenders passed on the increases to borrowers linked to external referrals. And even loans linked to the marginal cost of funds-based lending rate (MCLR) have seen an increase.

A rise in retail fixed deposit rates was much smaller than the rise in lending rates. Bulk deposit rates have increased, however.

“Retail term deposit rates rose across the board, but not in proportion to the rise in repos,” ICICI Securities said in a note.

“Block deposit rates have seen the largest increase of 100 to 170 basis points in a one-year period. In less than a year, the differential between retail and wholesale deposit rates is fully closed compared to a variance of more than 100 basis points previously,” the note reads.

Although credit growth looks encouraging, experts have pointed out that the benchmark policy rate is expected to rise further due to high inflation, which could hurt the demand for and drawdown of credit in the system.

“…the lagged impact of tighter monetary policy and high inflation may begin to be reflected towards the end of this fiscal year and next fiscal year in credit growth,” Agarwal said.