Credit growth may moderate to 13% to 13.5% this fiscal: Report
Credit growth in India is anticipated to witness a moderation to approximately 13-13.5 percent during the current fiscal year (2023-24), as reported. This expected deceleration can be attributed to several factors, with a prominent driver being the reduced demand for wholesale credit. Notably, wholesale credit constitutes a substantial portion, around 60 percent, of the overall credit market.
After experiencing a remarkable growth rate of 15 percent in the previous fiscal year (2022-23), wholesale credit is projected to slow down significantly, falling within the range of 11-11.5 percent for the current fiscal year. This moderation in the growth of wholesale credit is a pivotal factor contributing to the overall slowdown in credit expansion. However, the report also indicates a slight improvement in credit growth for the following financial year (2024-25), reaching around 13.5-14 percent, as the economic pace is expected to pick up.
An essential factor to monitor in determining future credit growth is the extent to which deposit growth increases for banks, as highlighted by Crisil Ratings. While retail credit demand is expected to continue rising in the current fiscal year, corporate credit demand is lagging, with potential for a pickup in the following fiscal year due to a revival in capital expenditure, as noted in the report.
In terms of absolute numbers, overall bank credit reached Rs 148 lakh crore in the fiscal year 2022-23, registering a year-on-year growth rate of 15.9 percent. However, the report suggests that this growth will moderate, with total bank credit expected to reach Rs 168 lakh crore, growing at a rate of 13-13.5 percent in the current fiscal year. Looking ahead to the next fiscal year, it is projected to further increase to Rs 191 lakh crore, with a growth rate of 13.5-14 percent.
The report attributes the moderation in credit demand in the current fiscal year to several key factors, including an expected decline in gross domestic product (GDP) growth, which is anticipated to fall to 6 percent from the previous fiscal year’s 7.2 percent. This reduction in GDP growth is expected to have an impact on overall credit growth. These factors collectively shape the outlook for credit expansion in the banking sector in the coming years.
The outlook for credit growth is influenced by several key factors, as highlighted by Crisil Ratings. Firstly, the easing of inflation and some softening in commodity prices are expected to play a role. A significant portion of the growth in wholesale credit in the previous fiscal year was driven by higher working capital demand in a high-inflation environment. However, moving forward, inflation levels are projected to be lower than in the previous fiscal year.
Secondly, robust bond issuances in the first half of the current fiscal year, coupled with changes in interest rates, have led to a substitution of bank credit with debt capital. This substitution supported wholesale credit growth in the previous year, especially in the first half. However, this trend is not anticipated to be as pronounced in the current fiscal year.
Finally, the agency also considers the high-base effect as a contributing factor. Strong economic growth in the fiscal year 2023, particularly in the second half, has created a high base for comparison, which can impact the growth rate in the current fiscal year.
On the other hand, retail credit, which comprises 28 percent of the overall credit, is expected to continue its healthy growth trend, with an estimated rate of 19-20 percent. This growth rate is similar to what was observed in the previous fiscal year, indicating sustained demand for retail credit despite the broader credit market’s moderation. These factors collectively shape the dynamics of credit growth in India, with retail credit remaining a significant driver in the overall credit landscape.
Krishnan Sitaraman, the senior director and chief ratings officer at the agency, has provided valuable insights into the anticipated trends in credit growth for the upcoming fiscal year. According to Sitaraman, the next fiscal year is expected to witness an overall turnaround in credit growth, primarily driven by an anticipated improvement in GDP growth to 6.9 percent.
Within this context, wholesale credit is likely to experience a modest uptick, projected to fall within the range of 11.5-12 percent. While not characterized by rapid growth, this sector is expected to show signs of improvement. Retail credit, on the other hand, is poised to remain a key driver of growth, expanding steadily at a rate of 19-20 percent. Agriculture credit is expected to remain relatively stable, ranging from 9-10 percent.
Corporate credit, which constitutes a significant portion, accounting for 45 percent of overall bank credit, is anticipated to pick up in the next fiscal year. This revival is expected to be driven by a more substantial-than-expected resurgence in private industrial capital expenditure, spurred by increased capex announcements for the upcoming fiscal year.
Additionally, on the services side, demand from non-banking entities is likely to continue supporting corporate credit growth, given the favorable growth tailwinds they are experiencing. In the micro, small, and medium enterprises (MSME) segment, which comprises 15 percent of overall credit, credit demand is projected to remain steady. This steadiness is attributed to the significant role that MSMEs play in the broader economy, as well as the flow-through impact of productivity-linked incentive schemes.
Furthermore, with ongoing efforts to formalize the sector, including improvements in digital public infrastructure, the addressable customer base for banks is expected to expand over the medium term. These dynamics collectively shape the outlook for credit growth in the coming fiscal year.
Retail credit growth is anticipated to remain robust at 19-20 percent in the next fiscal year, a rate similar to that observed in the previous two fiscal years. This growth will be driven by steady demand for home loans, which represent the largest sub-segment of retail credit. Additionally, unsecured loans, including personal loans and credit cards, are expected to grow at a faster pace. This growth in unsecured loans can be attributed to several factors, including increased digitization, a shift towards organized credit, and growing comfort with borrowing for discretionary spending.
Subha Sri Narayanan, a director with the agency, underscores the sustainability of demand drivers for credit, projecting a 13-14 percent growth in the next two fiscal years. However, it’s crucial from a funding perspective that deposit growth keeps pace. Narayanan expects the gap between credit growth and deposit growth to narrow, reducing from 500 basis points (bps) observed in fiscal year 2023 to 200 bps. This narrowing gap is expected to occur as deposit rates continue to rise, ensuring a more balanced relationship between credit and deposit growth. Such a balance is vital for the stability and sustainability of the banking sector.
