Credit demand set to remain high this year

Despite expectations of a rise in interest rates, bankers and economists are predicting high credit demand in the current financial year.

Market participants expect a minimum rise of 25 basis points in policy rates in the annual monetary and credit policy announcement by the Reserve Bank of India (RBI) on May 3. Many feel a rise of 50 basis points cannot be ruled out, owing to the rising core inflation.

“Given the growing element of structural as well as commodity-related factors determining inflation, the key issue would be whether RBI accepts a slightly higher level of inflation in the immediate near term,” said Intergroup economists Rohini Malkani and Anushka Shah. They expect a rise of 75-100 basis points in the course of financial year 2011-12. These rate increases are, however, unlikely to hit credit demand in the current financial year. Bankers say credit demand would be high, in line with the economy’s growth estimated at 9 per cent.

“We have targeted credit growth of 22 per cent after factoring in the likely rate increases by RBI during the course of the current financial year,” said T M Bhasin, chairman and managing director, Indian Bank.

Bank of Baroda and ICICI Bank have estimated their credit growth targets for the current financial year at 24 per cent and 20 per cent, respectively. Economists at Standard Chartered Bank say credit given to the private sector by banks generally has a strong correlation with economic activity. They expect credit growth to be around 20 per cent in the current financial year. The banking industry saw robust credit growth in financial year 2010-11 —- 21.4 per cent as on March 25. RBI had projected credit growth of 20 per cent in the same period.

RBI raised policy rates eight times in financial year 2010-11 to tackle rising inflation and banks raised their lending rates at least thrice in the same period. The wholesale price index (WPI) stood at 8.98 per cent in March, higher by almost 100 basis points than RBI’s estimate. “We expect the WPI to remain sticky at 7.5-8 per cent in the current financial year, with an upward bias due to fuel price adjustment,” said Citigroup economists.