With Covid Fears In Check, Credit Growth Is Making A Slow Comeback
After an extended period of subdued growth, non-food bank credit is growing at its fastest pace in nearly two years, as the economy recovers from second Covid-19 wave. Credit growth could strengthen further as banks try and capture the festive demand from retail customers.
For the fortnight ended Sept. 24, outstanding non-food credit of scheduled commercial banks rose 6.75% year-on-year, according to the Reserve Bank of India data. Banks had last seen a year-on-year credit growth of 7% or above in December 2019.
CARE Ratings Ltd. estimates that bank credit growth for the year will rise further to a range of 7.5-8%. This will be aided by a low base, economic expansion, extended support from government schemes like the emergency credit-linked guarantee and improved demand for retail credit.
"The medium-term prospects look promising with diminished corporate stress and increased provisioning levels across banks," CARE Ratings said in its Oct. 9 note.
Private Banks Leading The Growth
Much of the growth is being led by private banks.
HDFC Bank Ltd.'s outstanding loan book rose 15.5% year-on-year to Rs 11.98 lakh crore as of Sept. 30.
For India's largest private lender, a big part of the growth during the quarter came from its rural and commercial banking business, where outstanding loans rose 27.6% from a year earlier to Rs 3.59 lakh crore. Outstanding retail loans rose 13% over the preceding year to Rs 4.82 lakh crore.
While addressing analysts after announcing the quarterly results on Saturday, the bank's management said retail loans are set to make a comeback after a few quarters of muted growth. It also intends to grow its rural and small-business lending segments.
According to quarterly data disclosed by a handful of banks in the run-up to the September quarter earnings, credit growth is showing signs of reversal for most private lenders.
Incrementally, the banks mentioned above have extended Rs 65,928 crore in the first two quarters this fiscal, according to BloombergQuint's calculations. Apart from RBL Bank Ltd. and Bandhan Bank Ltd., which saw their outstanding advances fall since March 31, the loan books of all other banks have grown this year.
According to RBI's fortnightly data, outstanding non-food credit of the banking system has risen by Rs 4,143 crore this fiscal.
Most private lenders are aggressively targeting mortgages and retail loans this festive season, which could help push up credit growth.
Lenders, including Kotak Mahindra Bank, State Bank of India, Bank of Baroda, Punjab National Bank and Bank of India, have lowered home loan rates to their lowest in nearly a decade for the festive season. Products such as "Buy Now, Pay Later", too, are showing signs of rising user interest.
Will State-Run Banks Follow?
While state-run banks are typically slower to return to growth, they're being pushed by the government to lend.
According to an executive director at a mid-sized state-run bank, the Finance Ministry has reached out to the top management at various banks to begin credit outreach programmes.
Each bank has shortlisted lead districts where they see maximum business and are rolling out outreach programmes over October and November, the banker said. These will target retail, agriculture and small business borrowers.
While Dussehra has been good for most banks, Diwali is expected to be even better, the banker said. The programmes are expected to cover over 500 districts across India within two to three weeks.
"Most of this growth is being led by retail and small businesses, as corporates are still in the process of deleveraging their balance sheets," said Dhananjay Sinha, head of strategy research and chief economist at JM Financial. "With the excess liquidity available with banks, we can expect retail to be the mainstay of credit growth this year."
Corporate Borrowers Still Absent
According to data from CARE Ratings, incremental bank credit to corporates was negative between April and August, but turned positive in September.
However, bank credit to corporates is expected to remain tepid as corporations deleverage and opt to raise money from the bond markets, where rates have been lower. Economic uncertainty may also continue to weigh on this segment.
"The subdued credit offtake by industry and services, which is weighing down overall credit growth, is in a large part reflective of the uncertainties faced by businesses and their reluctance to take on additional liabilities," CARE Ratings said in an Oct. 14 report. "The wariness of banks to lend to certain segments on concerns over asset quality has also been an inhibiting factor to credit growth."
According to Sinha, corporate credit growth is likely to come back in a big way only after 12-18 months, which is when the banking system will likely see double-digit credit growth.
"We have had a lot of false starts on this front now," Sinha said. "So we need to watch how companies behave and whether profitability and capacity utilisation continue to remain strong till next year."