Credit growth remains strong despite rate hike…

–Mr. Priyank Kothari, Director of Arvog

Credit demand in India will keep growing steadily, despite rising interest rates as the country’s economy recovers from the COVID-19 pandemic. The credit growth has been upward since the latter half of FY22 and has been in double digits since April 2022, despite a 190-basic point hike in the repo rate.

Credit refers to loans from a banking institution to a business or individual. This rise in loan demand is called credit growth and is an essential indicator of economic activity. The amount of outstanding loans from banks to non-banking financial institutions (NBFCs) has increased due to the improved demand for credit, stabilising trends in asset quality, and improved collection efficiency.

Credit growth at multi-year high

Due to a rebound in economic activity following the COVID-induced lockdown, NBFCs are seeing an increase in demand for credit. Underlying industries like housing and auto sales are growing strongly, and industries like microfinance, personal loans, and education loans
are also seeing an increase in demand.

Bank credit grew at 16.2 percent in the fortnight that ended September 9, the highest in about nine years, aided by a revival in the economic activity post-Covid, increased working capital demand, rising discretionary spending, and low-base effect.

Banks’ lending to NBFCs increased by 30.6 percent annually (YoY) to Rs 11.7 lakh crore in September 2022, primarily due to a favourable base effect. The retail loan growth remained strong (up 18.1 percent YoY), led by YoY growth in credit cards, auto, and home loans. The report observes that credit growth in the services sector stood at 12.8 percent YoY in June, led by healthy growth in NBFCs (up 21.1 percent YoY). The improvement in loan offtake to NBFCs and trade sectors was the primary driver of credit growth in the services segment. In contrast, the home and auto loan segments were the main drivers of acceleration in retail loans.

What is driving this Credit growth

The outlook for India’s credit growth has seen some modest rise in recent years and will continue to be positive for several reasons. Many NBFCs have improved their capital ratios, provisioning, and asset quality to strengthen their balance sheets, further boosting confidence. Economic expansion, rise in government and private capital expenditure, rising commodity prices, implementation of production-linked incentive schemes, and the push for retail credit would continue to be the key drivers.

There is a pick-up in the economy, and we are seeing normalcy in all the sectors post-Covid. The retail sector’s discretionary spending was delayed and is currently getting consolidated. Banks are witnessing an increased demand for funds from retail-focused non-banking financial companies (NBFCs).

India’s bank credit growth is anticipated to remain positive

The banking system in India, especially the non-banking financial companies (NBFCs), is witnessing a healthy recovery in loan growth, led by a resurgence in the corporate segment, while growth in retail and SME segments remain strong. Although deposit growth is only moderate, an increase is anticipated, given the growing interest rate environment. Given the challenging macroeconomic context, it is critical that we closely monitor all significant changes in the demand environment. However, banks and NBFCs with more CASA and floating rate loans will likely fare better in a rising rate environment.

The overall outlook for credit demand for NBFCs going into FY23 is encouraging due to the recent trends, the strong monsoon season, and the anticipated further uptick in demand brought on by the start of the festival season in the second half of 2022.

We expect credit growth to be 12-13 percent in FY23, compared to 8.59 percent in the previous fiscal year. The credit growth will likely continue in the short term due to the festive season. After modest credit growth in recent years, the medium-term prospects look promising, with diminished corporate stress and a substantial buffer for provisions.