Credit growth may moderate to 13-13.5% this fiscal: Report

Mumbai: The credit growth is likely to moderate to 13-13.5 per cent this fiscal but will improve slightly to 13.5-14 per cent next financial year as the economic pace picks up, according to a report.

The biggest factor driving the moderation is low demand in wholesale credit, which constitutes as much as 60 per cent of the overall credit. Wholesale credit is seen slowing to 11-11.5 per cent this fiscal from a decadal high of 15 per cent in 2022-23, Crisil Ratings said in a report on Thursday.

A key monitorable, which will determine credit growth going forward, is the extent to which deposit growth picks up for banks, Crisil Ratings said.

The retail credit demand will continue to go up in this fiscal but corporate credit demand is lagging, which is likely to pick up in the next fiscal on capex revival, the report noted.

In absolute terms, overall bank credit stood at Rs 148 lakh crore in FY23, clipping at 15.9 per cent year-on-year, and this is likely to grow to Rs 168 lakh crore or 13-13.5 per cent this fiscal and further grow to Rs 191 lakh crore or 13.5-14 per cent in the next, it added.

According to the agency, the credit demand moderation this fiscal will be because of the following four key reasons -- gross domestic product growth is expected to fall to 6 per cent this fiscal from 7.2 per cent last fiscal, which will impact the overall credit growth.

Secondly, the easing of inflation with some softening in commodity prices. A significant part of the growth in wholesale credit (comprising corporates and micro, small and medium enterprises) last fiscal was driven by higher working capital demand in a high-inflation environment. Going forward, inflation levels are expected to be lower than the last fiscal.

Thirdly, robust bond issuances in the first half of this fiscal with the changes in interest rates have seen a substitution of bank credit with debt capital, which also supported wholesale credit growth last year, especially in the first half. But this is not seen to the same extent this year.

Finally, given the strong growth in fiscal 2023, especially in the second half, the high-base effect will also be a factor, said the agency.

The retail credit, which is 28 per cent of overall credit, is expected to continue to grow at a healthy rate of 19-20 per cent, similar to last fiscal.

According to Krishnan Sitaraman, a senior director and chief ratings officer at the agency, the next fiscal should see a turnaround in overall credit growth and start inching up on the back of an expected improvement in GDP growth to 6.9 per cent.

Within this, wholesale credit is likely to see a modest increase to 11.5-12 per cent, while retail should continue to remain the key growth driver, expanding steadily at 19-20 per cent. Agriculture credit growth should remain range-bound at 9-10 per cent.

Corporate credit, which is 45 per cent of overall bank credit, is likely to pick up next fiscal from the current fiscal level, driven by a more than expected revival in private industrial capex on the back of more capex announcements next fiscal.

On the services side, demand from non-banks should continue to support corporate credit growth on the back of their decent growth tailwinds.

In the MSME segment, which is 15 per cent of overall credit, the credit demand should be steady hereon, given their role in the overall economy and the flow-through impact of the productivity-linked incentive scheme. Further, with the steady push for the formalisation of the sector, including improving digital public infrastructure, the addressable base for banks should increase over the medium term, Sitaraman said.

Retail credit growth, which should remain robust at 19-20 per cent next fiscal -- similar to the previous two fiscals, will be driven by steady demand for home loans, the largest sub-segment of retail credit.

Unsecured loans (personal loans and credit cards) are expected to grow faster, driven by greater digitisation, a shift to organised credit, and increasing comfort with borrowing for discretionary spending.

According to Subha Sri Narayanan, a director with the agency, overall, while demand drivers for credit are expected to sustain a 13-14 per cent growth in the next two fiscals, it will also be important from a funding perspective that deposit growth does not lag too far behind.

He expects the differential between credit growth and deposit growth to narrow to 200 bps from the 500 bps seen in fiscal 2023 as deposit rates continue to inch up.