Bank Credit Growth To Stay Healthy, Slip 200 Bps To 14%

Retail segment to grow fastest, corporate to hold steady, MSME to slow on a high base

Ajit Velonie, Senior Director, CRISIL Ratings

FinTech BizNews Service 

Mumbai, May 28, 2024: Bank credit growth is expected to moderate ~200 basis points (bps) to ~14% this fiscal after an estimated robust growth of ~16%1 in fiscal 2024

Strong economic activity and retail credit demand drove loan growth last fiscal. This fiscal, growth will be tempered by a high base effect, a revision in risk weights and a somewhat lower gross domestic product (GDP) growth.

The fundamental drivers of credit demand are broadly intact and a revival in private corporate capital expenditure (capex), especially towards the second half of fiscal 2025, can provide tailwind.

On the other hand, the pace of deposit growth can keep a check on credit growth, even though the differential between the two has reduced over the past year.

Within the expected overall bank credit growth of ~14% in fiscal 2025, the largest segment, corporate credit (~45% of bank credit) should see growth remaining steady at ~13%, while retail (~28% of bank credit), the second-largest segment, is expected to grow the fastest at ~16%

Says Ajit Velonie, Senior Director, CRISIL Ratings, “Growth in corporate credit will be supported by private sector industrial capex in fiscal 2025, underpinned by expectations that GDP growth will remain solid at 6.8%, although lower than an estimated 7.6% in fiscal 2024. Steel, cement and pharmaceuticals will lead the capex recovery. Emerging sectors such as electronics and semi-conductors, electric vehicles (EVs) and solar modules will also contribute to capex, especially over the medium term2. The pick-up in capex should offset the impact of lower growth in bank funding to non-banking financial companies (NBFCs) – key growth driver within corporate credit earlier – on account of the 25 percentage points higher risk weight on lending to higher-rated NBFCs.

Says Subha Sri Narayanan, Director, CRISIL Ratings, “Banks have been managing their funding requirement through other avenues, such as dipping into their excess statutory liquidity ratio (SLR) holdings. However, the excess SLR held by banks has declined by over 250 bps on average over the last two fiscals, and the reduced flexibility there makes deposit growth even more critical. While there are intermittent signs of some easing in systemic liquidity, sustainability is to be seen and competition for deposits will likely keep deposit rates elevated. Banks will, therefore, need to balance their growth aspirations and protect margins, depending on their ability to mobilise cost-effective deposits.

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