Credit growth may slow over 12-18 months: HSBC

Amid signs of an economic slowdown, high interest rate may impact credit growth and net interest margin of banks in a year’s time, with credit growth this year at par with expectations at 18-20 per cent, said Naina Lal Kidwai, country head, HSBC, here today.

To tame a persistently high inflation, the Reserve Bank of India raised interest rates for the tenth time since March 2010. It raised the repo rate by 25 bps to 7.5 per cent in its last monetary policy.

“Credit growth, this year, will continue to be at 18-20 per cent. But the problem is what happens later because this year we have projects which have already been sanctioned previously, so people are continuing to complete that. However, high interest rates in the yield today will impact investment decision for tomorrow. Thus,credit growth down the line may slow down if investment indeed slows down,” she said on the sidelines of an industry meet here today.

HSBC expects the GDP growth rate this year to be slightly lower than eight per cent, which is lower than Planning Commission Deputy Chairman Montek Singh Ahluwalia’s estimate of 8.2-8.5 per cent. “At HSBC research, our view on GDP is that it will be lower more like eight per cent over the next year, so that would indicate the GDP is slowing,” said Kidwai.

Corroborating Kidwai’s view, Kalpana Morparia, chief executive officer of JPMorgan said she expected the GDP growth rate to be little less than eight per cent, with credit growth at 18-20 per cent. “We expect the GDP growth to be a shade under eight per cent,” said Morparia. So far, the impact of high interest rates have not been visible on non-food credit growth.

According to RBI data, on a year-on-year basis, non-food gross bank credit increased by 21.9 per cent in May this year, compared to 18.1 per cent in the corresponding period of 2010. However, credit to agriculture on a y-o-y basis increased by 12.8 per cent in May, compared to 21.0 per cent in the previous year.

Food inflation fell to a one-and-a-half month low of 7.78 per cent for the week ended June 18 on the back of cheaper vegetables, pulses and potatoes.

MARGIN UNDER PRESSURE
High interest rates would impact net interest margin of banks, said Kidwai “At this moment there is no pressure on margins, but when both lending and deposit rates are going up, matching becomes important. If beyond a point we cannot pass on the interest-rate hike to consumers, then banks will see a squeeze in margins going forward.”

This apart, corporates might also see pressure on margins due to rising commodity prices. “Margins will not be a function of interest rates but margins are under pressure because commodity prices have increased, prices will be under pressure because of power prices having gone up and margins will be under pressure also because of interest rates. So I would say by and large there would be pressure on corporates in terms of margins,” she said.