MUMBAI: The worst for bank credit growth, which hit a three-year low of 8.97% in May, could soon be over, said bankers and analysts. They added that things could start turning around after the September quarter.
There are multiple reasons why things are beginning to look up. “There is enough liquidity in the banking system, the decision on tariffs will be addressed for corporates, there is domestic demand and inflation is at a low which means that people will have purchasing power. All this makes me believe that credit growth will be in double digits.” Dinesh Khara, former State Bank of India chairperson said.
Analysts expect credit growth to inch up to double digit figures in the second half of the current financial year. “Forecasting for the next month will be difficult but for the year, the number should settle at a higher level,” Karan Gupta, head and director of financial institutions, India Ratings said. “We estimate a credit growth of 13% for FY26,” he added.
Another banker with a large private sector bank added that while credit growth is expected to be in double digits, it could be on the lower side, that is, around 10%-11%, primarily because of global uncertainty that will keep corporates on the edge. “It has been a long haul, in terms of global uncertainty. It started with Israel- Hamas, then India-Pak and now Israel-Iran. As a result, supply-chains are getting blocked. While some people believe that there won’t too much spike in crude oil prices, it may be more of wishful thinking.”
He argued that the capacity utilisation for the corporate sector is around 75%, so, there is still some runway left before they start investing. And the small investment that need to be made are mostly happening from internal accruals, hence there is little credit demand.
HDFC Bank’s Managing Director and CEO Sashidhar Jagdishan in post earning analyst call had said that in 2025-26 (Apr-Mar), the bank expects the GDP to be supported by a pickup in rural spending, discretionary consumer demand and investment activity.
The credit growth of the banking sector was 19.95% in December 2023. However, a spate of issues including woes in the micro-finance segment and personal loans saw banks slowing down credit to these segments. At the same time, from September onwards when the rupee came under pressure, the Reserve Bank of India (RBI) stepped in aggressively to stem the fall.
The banking sector went through a phase of severe liquidity crunch, as the deficit stood at Rs 3.3 lakh crore. However, things have turned around since March and there is sufficient surplus liquidity now.
The RBI has already done more than its bit to help bolster credit, both in terms of action and soothing nerves. In the June policy, it cut repo rate by 50 basis points – a surprise. It also cut the cash reserve ratio by 100 basis points which will be implemented in four tranches, starting September. This is expected to infuse an additional liquidity of Rs 2.5 lakh crore in the banking system.
Besides ensuring enough liquidity, it has also announced other changes, such as rolling back the risk weight norms for unsecured consumer loans and NBFCs which were implemented in November 2023.
After the risk weights norms were introduced, the banks’ credit to NBFCs fell to 15% on year in December 2023, from 18.9% on year in November 2023. As on April, bank credit to NBFCs stood at 2.9% on year.
The RBI has also finalised the guidelines for gold loans for banks and non-bank lenders. Analysts believe that this could also aid in credit growth. As per the sectoral deployment data, the bank loans against gold jewellery rose 119.6% on year to Rs 2.23 lakh crore as on April 18.
In the June Monetary Policy Meeting, the Reserve Bank of India RBI Governor Sanjay Malhotra said that the stress witnessed earlier in retail segments like unsecured personal loans and credit card receivables portfolio has “abated”.
Source: The Financial Express
