After hitting road bump in Dec, bank credit growth to regain pace in Q4

After experiencing moderation in YoY growth by the end of December 2022, bank credit in India is expected to regain pace in the fourth quarter of FY23. 

The bank credit will need to expand by Rs 6.1 trillion in absolute terms in the current quarter (Q4FY23) to clock 17 per cent Year-on-Year (YoY) growth in FY23, according to India Ratings and Research (Ind-Ra).

Ind-Ra said the credit expansion of (Rs 6.1 trillion) does not seem like a stretch goal, given the level of economic activity in the system. The non-bank finance companies (NBFCs) and retail segments contributed significantly to the growth in 3QFY23.

The bank credit was growing at over 15 per cent YoY credit since September 2022. However, slowed down to 14.9 per cent YoY as of December 2022 from a high of 17.4 per cent YoY as on 16 December 2022. The absolute credit in the system grew Rs 1.5 trillion in the fortnight ended December 30, 2022 in comparison to Rs 3.8 trillion over the same period last year.

Turning to the challenge of raising funds to support credit demand, the Rating agency said the deposit growth has been lagging advances growth since it started picking up in FY22. The growth remained muted at 9.2 per cent YoY as of December 30, 2022.

“We are also seeing higher reliance among banks to raise certificate of deposits (CDs) where their share in incremental deposit growth has now increased to 12.7 per cent versus 6.8 per cent in FY22. While banks have been increasing their deposit rates, they are still lagging the increase in the repo rate.”

With the credit growth expected to remain strong, it is likely to continue to outpace deposit growth which will keep pushing up deposit rates in the near term and increase competition among banks to grow their deposits franchise, it added.

The rating agency sounded caution about credit growth in Fy24. Continuing inflationary pressures, rising interest rates, and slower deposit growth however could weigh down on credit growth in FY24 as borrowings become costlier.

In the near term, a continuing working capital demand from corporates and a continuing shift from the bond markets to the banking system amid rising interest rates would keep the credit growth drivers in place for the industry segment. 

The industry segment grew 13.1 per cent YoY in November 2022 in comparison to 6.5 per cent yoy in March 2022.

Retail loans continue to be the single-largest contributor to the incremental YoY growth, although the proportion declined to 35.1 per cent in November 2022 from 40.9 per cent in March 2022. Retail loans grew 19.7 per cent YoY in November 2022 compared to 12.7 per cent yoy in March 2022.