Credit growth continues to remain muted

Despite the Reserve Bank of India's expectations that bank credit will improve by September-October, credit in the banking system has continued to remain lacklusture the entire year.

However, after six months, bank credit has finally managed to inch up to double digits as the year comes to a close.

According to the December 11 Reserve Bank of India data, bank credit grew 11 per cent against the year-ago period. For the rest of the financial year, credit growth had continued to hover in the range of nine-10 per cent.

Bankers said this growth in credit was mainly led by the retail sector and not corporates. "Every year, towards the end, there is a slight uptick that is noticed in the system. It is mainly led by the overall festival season and so it is difficult to say that it can be confirmed as a trend. But we believe that next year will be better than this year," said K A Babu, head, retail, Federal Bank.

But lenders said the festival season wasn't as good as they had expected it to be. At the end of November 10, festival season credit growth slipped to 8.9 per cent, the lowest rate of growth this financial year.

Typically, credit growth inches up in the second half of the year. Bankers said the third and the fourth quarters of the year would be better.

However, corporate demand for credit was mainly for working-capital loans as new investments were yet to pick up. (Working capital is a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as: Current assets minus current liabilities.) "We have seen some investments in certain sectors such as renewable energy, but some of the other sectors such as power and infrastructure continued to struggle. Moreover, banks have also been cautious in lending to these because of worries of bad loans. So credit growth remained weak, five-six per cent, on the corporate side," said a corporate head of a public sector bank.

"Lack of firm credit demand and risk-aversion are factors behind the relatively low pace of credit growth, though state banks also face constraints - weak capital buffers and balance sheet stress," said a report by Fitch Ratings.

However, credit growth is expected to be 12-13 per cent in FY16, against 9.7 per cent in FY15.