Credit growth of banks recovers; festivals help demand: Ratings agency

Bank credit grew by 180 basis points from the year-ago level of 5.1 per cent in the fortnight ended October 23, 2020: CARE.

The banking system’s credit growth is recovering, helped by festival-time demand for retail loans, according to analysis by a rating agency.

The year-on-year (y-o-y) bank credit grew by 180 basis points from the year-ago level of 5.1 per cent in the fortnight ended October 23, 2020. This is also a 40 basis points improvement from the previous fortnight. In absolute terms, credit offtake increased by Rs7.1 trillion over the last twelve months and by Rs.0.3 lakh crore as compared with the previous fortnight.

The y-o-y increase reflects “the low base effect, festival season spending, and the easing of lockdown restrictions across regions in India,” CARE Ratings said in a note. 

The credit growth remained tepid amid the second wave of the pandemic, but after restrictions were eased since June 2021, bank credit growth improved gradually from 5.7 per cent (fortnight, June 04, 2021) to 6.8 per cent (fortnight, October 22, 2021).  

The overall non-food credit growth continues to be driven by retail, and agriculture & allied activities segments, but with the onset of the festive season, the retail segment pulled up the credit growth. 

“This rise has been supported with rate cuts by banks to push retail credit as several banks are offering home loans at record low interest rates ahead of the festive season, e.g., in October 2021, banks like PNB have cut down its benchmark lending rate by 5 basis points to 6.50 per cent and Union Bank of India (UBI) has slashed the interest rate on home loans by 40 basis points," said CARE. 

It expects credit growth of 7.5 per cent to 8.0 per cent for FY22 with a low base effect, economic expansion, extended ECLGS support (sanctions permitted till March 2022 and disbursements till June 2022), and retail credit push.  

“The medium-term prospects look promising with diminished corporate stress and increased provisioning levels across banks. Retail loan segment is expected to do well as compared with industry and service segments,” CARE said.