Commercial bank credit growth reached a nearly nine-year high for the week ending August 26 at a rate of 15.5 per cent year over year. The increase in credit is at its greatest level since November 1, 203, when it reached 16.1 per cent, according to the information provided by the Reserve Bank of India.
Banks have granted loans totaling Rs. 5.66 trillion in the current fiscal year thus far, an increase of 4.8 per cent as compared to a decline of 0.5 per cent during the same period previous year.
“Credit growth in the system is quite robust currently and at a multi-year high but touching 20 per cent growth looks challenging given that most of the heavy lifting is being done by the retail segment,” Prakash Agarwal, director and head–financial institutions, India Ratings.
“For credit growth to touch 20 per cent, the pace of economic growth to be much higher entailed larger credit expansion on the industrial side as well as supporting deposit accretion. Credit growth should sustain at these levels for some time, especially with the festive season around,” he said, adding there could be some impact on loan demand going forward due to inflation and interest rate hikes.
The statistics showed a 9.5 per cent YoY increase in deposits. This financial year, deposit growth has lagged behind credit growth, raising fears among analysts that weak deposit growth may become one of the main systemic barriers to loan growth.
“We have seen a steady and broad-based pick-up in system credit growth despite rising interest rates, which we view positively. However, a widening gap between deposit and credit growth, remains our primary concern as it could lead to supply-side constraints going ahead,” said Macquarie Research in a report.
Credit growth has now maintained over 15% for two straight fortnights, signalling a more persistent uptick in demand. Banking credit expanded by 15.3 per cent over the two weeks that concluded on August 12 and deposits by 8.84 per cent. As of August 26, the incremental credit-deposit ratio was 107.13 percent.
“The concerning issue here is the widening credit – deposit growth gap which is multi year high. Banks need to plan as this may turn out to be a constraining factor. They would have to raise their deposit rates further to attract more deposits, which may lead to a rise in the MCLR in the system,” Agarwal said.
According to the RBI‘s most recent sectoral credit deployment report for July 2022, credit to industry also saw the highest growth since 2014 as a result of increased demand for working capital in an inflationary environment. The retail sector is also experiencing a respectable growth of almost 19 per cent, supported by both secured and unsecured loans. Due to the substantial increase in bond yields relative to bank lending rates, Indian corporations are increasingly turning to banks for their financial needs.
Loans to micro and small businesses increased by 28.3 per cent YoY, loans to medium businesses increased by 36.8 per cent YoY, and loans to big businesses increased by 5.2 per cent YoY. Sectoral lending to the mining, iron and steel, petrochemical, and petroleum industries was the main driver of industrial credit expansion, according to a research by ICICI Securities. Telecommunications, textiles, food processing, and other infrastructure, on the other hand, somewhat countered the accretion.
Despite the RBI tightening its stance on monetary policy, credit growth has been rising steadily since April of this year. Since May of this year, the benchmark repo rate has been raised by 140 basis points by the six-member monetary policy committee of the RBI. As a result, banks have raised their external benchmark linked loans by the same amount. The MCLR increase has not, however, been as significant as what is encouraging enterprises to increase their banking sector borrowing.
The repo rate or the rates on government assets like 91-day and 182-day Treasury Bills may serve as the external benchmark for 43.6 per cent of the banking system’s loans, according to statistics from the RBI. Additionally, the MCLR is a factor in 49.2 per cent of loans made through the banking sector.