Credit growth expected to pick up by Sept-Oct: RBI

Bankers say it has remained under pressure due to slowdown in the corporate segment

After more than a year of sluggish credit growth, the Reserve Bank of India (RBI) believes a pick-up in credit offtake can be expected by September-October.

RBI Governor Raghuram Rajan explained there was generally a lag of three-four quarters from when rates are cut and when the effects can be seen in the economy. "We started cutting the rates in January so I would start seeing the effects of the rate cut only in September-October-November… As loan demand picks up in Q3 (October-December) of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place," he added.

In this calendar year, the central bank has cut repo rate by 75 basis points (bps). In turn, banks have also reduced the lending rate by 25-30 bps.

In the April-June quarter, according to RBI data, credit in the banking system declined by 2.5 per cent whereas deposits declined by 1.26 per cent. In FY15, credit to the industry grew at the slowest pace in the last 17 years at only 9.52 per cent.

Bankers believe credit growth has continued to remain under pressure due to a slowdown in the corporate segment of the business. Industry players say the activity in the corporate side has remained mainly limited to working capital loans.

"Muted investments, rising risk aversion owing to deteriorating asset quality of public sector banks (PSBs), and an increase in cheaper funds raised via commercial paper (such issuances rose by 57 per cent year-on-year as on July 15, 2015) slowed credit offtake," said a report by rating agency CRISIL.

The report added it expects credit offtake to pick up in the second half of the financial year. "We expect a gradual pick-up in the latter half of 2015-16, driven by a rise in retail loan (automobile and home loans), public sector investments (which will, in turn, drive up working capital demand across allied sectors) and small-scale enterprises," added CRISIL.

Even though credit off-take is expected to pick up, there is no substantial improvement that is likely, believe bankers.

"Traditionally, credit growth is always stronger in the second half of the year and in that sense this year would be similar. But the indicators so far suggest that the growth may continue to remain muted," said Rajiv Anand, group executive, retail banking at Axis Bank.

Bankers believe this year, credit growth in the festival season will be better than last year but no major recovery is expected. "This year the growth will be better than last year but the improvement will not be substantial," said Arun Tiwari, chairman and managing director, Union Bank.

The banks will also need capital to fuel the next leg of growth. In this regard, RBI has welcomed the government's decision to infuse Rs 70,000 crore into public sector banks.

"Two years ago when we gave the guidance to banks and the government at that time, the bank sector was growing very fast. So now the growth has been slowed down to 13-14 per cent. Depending on the current level of growth, we have indicated that Rs 1,40,000 crore of capital may be needed. So the government has announced its intention to support the banks by giving Rs 70,000 crore. As of now it looks good," said R Gandhi, RBI deputy governor.

However, depending on the growth, the banks could require more capital. The government's estimate of the required capital infusion of Rs 1,80,000 crore in four years is based on expected credit growth of 12 per cent this financial year and 12-15 per cent each in the next three.

The estimates exclude the internal profit generation of banks. However, the regulator believes these are moving targets and need to be monitored regularly.

"These are moving targets on how the growth in economy picks up and also the profitability and the ability of the banks to retain profit. So all these points will have to be factored in as we move forward. But the range must be visible to you at Rs 1,50,000-2,50,000 crore over a period of implementation of Basel-III norms," RBI Deputy Governor S S Mundra said.