Rising rates, slow business growth to dent loan demand

Analysts fear repeat of 1991-92 situation

The modest recovery in credit growth earlier this month is unlikely to sustain as rising rates coupled with slow business activities and uncertain macro-economic environment are expected to dent loan demand. Some of the analysts even consider the situation to be worse than early 90s, when capital spending and credit demand was significantly weak.

"We have lost all hope. Nothing is going to happen till central government elections in April/May 2014 and we are now going to be in an extended period of low growth. Our economist does not expect much recovery in 2013-14 (even 2014-15 is very unclear as of now) and we expect disappointments on all fronts – loan growth, margins and asset quality," Suresh Ganapathy, analyst with Macquarie Capital Securities, wrote in a recent note to his clients.

Credit growth recovered to a five-month high level of 16.6% at the start of August after staying below 15% since the beginning of this financial year. Bankers had attributed the revival to strong demand for retail loans.

However, with lenders now increasing their loan rates demand for retail credit is likely to take a hit.

India's largest mortgage lender Housing Development Finance Corporation (HDFC) and largest private sector lender ICICI Bank have increased their lending rates by 25 basis points each from today. The moves follow lending rate hikes by other large and mid-sized private banks including HDFC Bank, Axis Bank and YES Bank.

"Borrowing cost is becoming expensive. Retail loan demand is expected to decline if the current situation persists. There is uncertainty over jobs and salary increments, while inflation is on the rise. Consumers will not be too keen to borrow money in this environment," said an analyst with a domestic brokerage.

Macquarie Capital Securities has cut its loan growth expectation to around 13% in the current financial year, almost 300 basis points lower than 2012-13 credit growth.

According to Barclays Capital, the slowdown in credit growth is likely to be more prolonged than the decline in deposit growth.

"The current macro context and consequently the monetary policy challenges are similar to those in 1991-92...If the 1991-92 scenario is repeated, the credit growth rate could drop to 10-11%. Slower system growth would put pressure on public sector banks given their inflexible cost structures," Anish Tawakley, analyst with Barclays Capital, said in his note to clients.