Sectoral reorientation of credit growth in the banking sector

Both during Manthan – 2022 and during the recent RBI meeting with bank chiefs, the need for a capital increase and a rapid withdrawal of credit was widely discussed, which can help accelerate the recovery of the economy at a time of heightened geopolitical risk and uncertainty.

Banks have been urged to raise capital in the market to build their resilience.

It should be noted that banks have performed well in key metrics over the past two years. Results from some large banks in FY22 further confirm a strong performance, especially with the headwinds of stronger credit growth. Let’s look at some of the data points to read the credit growth trend. SBI’s credit portfolio grew by 11%, PNB 6.18%, BOB 8.9%, Canara Bank 9.77% while Union Bank could show growth of 9.6%. HDFC Bank, 15%, ICICI Bank 18% (domestic), Axis Bank 17%. The recovery in credit growth can be seen in recent performance trends.

During the analyst presentation and media call called to discuss FY22 performance, banks presented an optimistic outlook for credit growth in FY23. More due to the credit cycle revival and expansion in manufacturing. In an environment of improving capital adequacy ratio (CAR), banks are better placed to stimulate credit growth. The strong fundamentals built over the past two years may also create opportunities for banks to raise capital in the markets to further improve CAR’s growth prospects. The improvement in the CAR in the context of better asset quality has also led to a decline in the cost of credit for banks. It can be factored into the pricing of loan products for the benefit of highly rated borrowers.

Another important factor likely to contribute to credit growth is the improved asset quality and increased provision coverage ratio (PCR) of banks posted in FY22. Improved loan recovery enables banks to use these resources to disburse new loans. With pent-up demand for credit appearing in FY23, banks can accelerate new credit.

1. Sectoral reorientation of credit growth:

It has been observed in FY22 that credit growth is rapidly returning to double digits with prospects for further expansion in FY23. % in FY21, it improved to 11.1% as of April 22, 2022. It was 8.4% in the third quarter of FY22. In the quarter ending December By 2021, public sector bank (PSB) credit growth was at a low of 4.7%, while private banks could increase credit over the period to 15%. PSOs now on a better footing can accelerate credit expansion.

Given the government’s renewed emphasis on infrastructure projects and industry, including reviving ailing contact-intensive sectors, PSBs are expected to join the growth momentum armed with improved profitability. Sectoral growth in March 2022 indicates firming trends. The flow of credit to the agricultural sector grew by 9.9%, industry – 7.1%, the service sector – 8.9%. The strongest growth was seen in the personal loan segment at 12.4%.

2. Reorientation towards personal loans:

Thus, the retail sector saw higher credit growth comprising consumer durables loans – 60% increase, gold loans – 21%, auto loans – 9.4%, housing – 6.4%, loans against stocks/bonds – 15.4%, unsecured personal loans – 23.1%. . In the post-pandemic regime, the demand for consumption and personal items has increased. Now the shift should be towards MSMEs, agriculture and industry to ensure equitable economic recovery across all sectors.

An SBI research report indicated that it is interesting to note that personal loans have become the main driver of bank credit in recent years and represent 30.5% of outstanding bank loans, exceeding the sector growth rate of 28.9%. The private sector and PSOs have shifted their focus to retail due to better profit potential in the sector, with corporate balance sheet deleveraging truncating lending opportunities.

At the same time, some of the rise in wholesale credit can be attributed to the shift from money markets to lending, with yields firming as the central bank began to drain excess liquidity. In addition, the rise in the price of raw materials, such as oil, has increased the need for working capital. Private sector banks led the recovery in credit, accounting for just over half of loan growth at 50.4%, with public sector banks accounting for 44.7%.

3. Rising lending rates

In high inflation, RBI on May 4 had raised repo rates by 40bps and CRR by 50bps, indicating a rise in the yield curve that could potentially rise further in the coming quarters. As policy rates have started to rise in many parts of the world to fight inflation, a hike in policy rates is a logical move to control inflation in India. Even before the hike in policy rates, banks started raising deposit and lending rates. As a result, lending linked to the marginal cost of funds-based lending rates (MCLR) and repo rates began to rise.

Many banks have raised lending rates. HDFC Bank – 30 bps, PNB – 40 bps, Yes Bank – 10-15 bps, ICICI Bank – 40 bps, but SBI kept lending rate hikes to a minimum of 10 bps base. Rising bank deposit and lending rates are a reality to normalize the easy money policy adopted to fight the pandemic. Now that the pandemic is on a receding trajectory, deposit and lending rates are expected to rise.

4. Way forward:

Having strengthened their core performance metrics, banks will now need to develop strategies to revive the velocity of lending to fund productive sectors of the economy in line with advice from RBI and other stakeholders. Although the growth of loans to individuals has a multiplier effect on the economy, it will be more important to increase the direct flow of credit to MSMEs, small businesses, agriculture and manufacturing sectors.

The availability of credit, even at high rates, is good because borrowers understand the changing macro economy and can pass on some of the rising costs to consumers. But the absence of credit will deprive entrepreneurs of the opportunity to develop. Many industry forums look forward to rapid credit growth. Credit growth activism can help the industry combat the current wave of business risk and uncertainty. Banks have a big role to play in the current market turmoil to rekindle the adrenaline of the sector to accelerate economic recovery and weather the onslaught of emerging risks.



The opinions expressed above are those of the author.