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Bank credit in India is likely to grow at 15 per cent in this financial year (FY23) and next (FY24) on the back of corporate demand recovering and the strong balance sheet of lenders, said CRISIL Ratings on Tuesday.
The estimate factors in an estimated seven per cent increase in gross domestic product (GDP) this fiscal, as well as impetus to credit growth from the government’s infrastructure push.
It takes into account higher working capital demand in a high-inflation environment, and some substitution of debt capital market borrowings. Strong balance sheets allow lenders to expand credit, said the rating agency in a statement.
“What will be a key monitorable in this high credit growth environment is whether deposit growth can keep pace. The past few months have seen a trend reversal, with credit growth running ahead of deposit growth,” said Subha Sri Narayanan, director, CRISIL Ratings.
“Also, surplus liquidity in the banking system is normalising. Therefore, banks may now have to raise deposit rates at a faster pace, which we are already seeing. In fact, with competition for deposits also set to intensify, some banks may have to resort to higher-cost wholesale deposits, which may impinge on their margins,” said Narayanan.
Downside risks to credit growth include lower-than-expected GDP growth, further sharp and unanticipated rise in interest rates, high inflationary pressures and slowdown in private consumption.
CRISIL said while GDP growth could see some moderation in FY24, this would be on a higher base and thereby have limited impact on credit demand.
Challenges in the past four or five years about asset quality have constrained credit growth, particularly for public sector banks (PSBs). After cleaning up and strengthening balance sheets and supported by equity infusion, PSBs are eyeing higher growth. As a result, their credit growth is seen at approximately 12 per cent over this fiscal and next: lower than the 17 per cent expected for private banks.
The segmental composition of growth is likely to be different. FY23 is likely to be driven more by the retail and micro, small and medium enterprises (MSME) segments and corporate credit could be a larger contributor next fiscal.
Krishnan Sitaraman, senior director and deputy chief ratings officer at CRISIL, said corporate credit may grow at a two-year compound annual growth rate (CAGR) of 10-12 per cent up to March 2024. This comes after a mere three per cent growth between fiscals 2019 and 2022. The corporate segment has 45 per cent of overall credit.
In FY23, additional working capital requirements due to high inflation and move from the bond markets to bank loans are driving growth but on a low base. On the other hand, next fiscal should see a revival in private sector capex, which then will become the key driver for higher corporate credit growth, said CRISIL.
Retail credit (26 per cent of total advances) is expected to grow the fastest at 17-19 per cent. Demand for home loans, the largest sub-segment, should stay robust despite rising interest rates and real estate prices.
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