Bank credit growth continued to decline in H1

The growth in bank credit fell to 7.8% year-on-year (y-o-y) in the first half of this financial year, ending September 30, 2016, according the Financial Stability Report (FSR), published by the Reserve Bank of India, released on Thursday. Public sector banks (PSBs) saw the weakest credit growth of 3.1% in this period with private lenders posting a robust 23.2% credit growth in this period. Foreign banks grew their loan books by 4.8% in this period.
 
Overall, PSBs continued to lose market share to their private sector counterparts. The PSBs’ share in credit came down to 68.6% from 70.2% in March 2016 with the private banks cornering 26.3% share. Foreign banks' market share remained largely unchanged at 5.1%.

 
Going forward, the central bank believes this trend of slow credit growth is likely to continue. “Scheduled commercial banks may remain risk-averse in the near future as they focus on cleaning up their balance sheets and their capital positions may remain insufficient to support higher credit growth,” the report said. Growth in corporate debt issuance, though, remained robust. The total flow of resources from the financial sector to the commercial sector remained sluggish during the first half of FY17, mainly due to the reduced contribution from banks.
 

The report highlighted that banks have slowed down on credit growth. “While on the one hand, with reforms, banks appear to be getting more resilient in terms of capital and liquidity with the gradual implementation of Basel-III, on the other hand they have cut activities that are deemed too costly to be commercially pursued amid regulatory and profit pressures,” the report added.

 
Even for the non-banking financials companies, loans and advances slowed down to 10.5% y-o-y growth at the end of September 2016 compared with a 16.6% increase in March 2016.
 
With the banks focused largely on demonetisation, especially in the initial few days, credit growth is likely to be lacklustre in the ongoing quarter and the current financial year, analysts believe.