Bank credit growth – expected to continue its expansion mode


Long-awaited bank credit growth is accelerating, with banks’ results for the third quarter of FY22 looking much better than before. Banks are on solid footing with improved capital adequacy ratios (CAR) and asset quality. RBI bank credit data for January 2022 indicates an overall uptick against the backdrop of trends over the past two years. Bank credit outstanding increased from 101.05 trillion rupees on January 31, 2020 to 115.82 trillion rupees on January 28, 2022, showing an annual growth (YOY) of 5.9% in January 2020-21, l increasing to 8.2% in 2021-22 (January 2021-22). Even sectoral credit growth is showing a slight acceleration.

Credit growth to the agricultural sector improved from 8.5% to 10.4%, industry from 0.7% to 6.4%, the personal loan segment which includes housing, car loans, credit cards, etc. fell from 8.7% to 11.4%. But there is a nominal decline in credit growth to the services sector from 8.1% to 7.3% because the high-contact industry continues to be under stress. RBI therefore provided separate allocations of TLTROs to banks to enable them to lend. The impact is not yet visible.

The positive trend continues to affirm credit growth at 7.9% year-on-year on February 11, 2022, compared to 6.6% recorded the previous year. On the other hand, deposit growth is showing early signs of slowing, posting a growth of 9.1% as of February 11, 2022, compared to 11.8% a year ago. Since deposit growth and credit growth depend on each other, they should be considered together.

1. Credit application:

With the 2022-2023 Union budget providing for an expansion of investment and infrastructure allocations, there will be an increase in demand for credit from industry. With Covid19 seemingly on a waning path dissipating into an endemic, FY23 may look for a more active revival of the economy. Despite external sector risks, the US Federal Reserve is well positioned to raise interest rates due to inflation hitting a 40-year high. But the national economy has already acquired enough resilience to withstand its negative impact, should it occur. Geopolitical tensions should ease as diplomatic channels come into play.

The only worrying point is the surge in crude oil prices which may exacerbate inflationary tendencies in India, creating a compelling situation for RBI to intervene appropriately. But with its firm commitment to supporting growth for as long as it takes to combat the impact of Covid19-related stress, it may not easily change its direction.

With the corporate sector having consolidated its borrowing and deleveraged its balance sheets, it is now in a better position to revive expansion, capacity utilization and restart the investment cycle. With the rapid expansion of exports, the corporate sector can create space to absorb more bank credit. Much of the stressed credit brought in under Restructuring – I and II enabled RBI to weather the Covid stress, this will create additional headroom for entities to borrow.

The government has increased the limit of the Emergency Credit Line Guarantee Scheme (ECLGS) to Rs. 5 trillion with extension of its availability till March 2023 or exhaustion of the limit whichever comes first. These developments should create a scope for applying for bank credit.

2. Banking System Outlook:

Seeking better performance from banks – during the post-pandemic period, Fitch Group-owned credit rating agency – India Ratings (Ind-Ra) has revised its outlook on the Indian banking sector to ‘s’ improve” from “stable” indicating that the health of the banking system is at its best in decades.

According to the rating agency, key financial indicators are expected to continue to improve in FY23, supported by stronger balance sheets and an improved outlook for credit demand with an expected start of the investment cycle for credit ratings. businesses. Although the outlook for credit growth is reduced to 8.4% for FY22, from its previous stance of 8.9%, credit growth is expected to catch up to 10% in 2022-23.

Similarly, global ratings firm Moody’s has revised India’s banking system outlook from “stable” to “negative” following its update of India’s sovereign outlook. In addition to diminished concerns about asset quality since the start of the pandemic, lower credit costs resulting from improved asset quality should translate into better profitability. Additionally, capital is expected to remain above pre-pandemic levels, making banks more robust with a better appetite for credit risk.

In a context of increased economic activity and increased public spending on infrastructure, the industry has the potential to boost demand for credit. With the return to normal, demand for personal credit is strong and demand for business credit is expected to increase, with the resumption of private sector capital spending leading to increased borrowing. Capex is expected to increase to Rs. 7 lakh crore each in FY22-23 from Rs. 5.5 lakh crore in 2020-21, which is expected to increase credit demand. Another Rs.2 lakh crore can reinvest in the economy due to Productivity Linked Incentives (PLI) provided by the government.

3. Way forward:

Despite the improvement in the CAR, the government is set to inject fresh capital of Rs 15,000 crore into some of the weaker banks to boost their capital base to comply with Basel-III standards. With more and more commercial banks partnering with non-banks to start sharing risk in order to lend under the RBI authorized co-lending scheme, the opportunities for credit growth will increase. Fintch companies are introducing many app-based lending products with algorithm-based risk assessment where loans will be directly credited to borrower’s accounts without manual intervention. With peer to peer (P2P) lenders becoming active, there is yet another channel entering lending transactions.

As MSME forums seek to simplify loan programs to open up formal credit channels, banks are racing to innovate the way they source, process and deliver credit to make it more user-friendly. borrowers. Recently, the Ministry of Finance has again stressed the need for banks to be user-friendly. From a holistic perspective, early signs of improving credit growth are expected to pick up, helping the economy maintain its growth trajectory despite external sector and geopolitical risks. These risks are expected to subside in FY23, creating an environment conducive to accelerating economic recovery.



The opinions expressed above are those of the author.



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