Credit growth in financial sector likely to moderate over IL&FS defaults

A near-liquidity freeze in the market after the defaults last month by Infrastructure Leasing & Financial Services entities has raised concerns over loan disbursals.

With worry of contagion from these defaults on their minds, bankers and financiers said caution has set in. The days of looking for an expanding loan book, without much concern for liquidity, are history. As a consequence, banks are reassessing their growth estimates. They, however, rule out a significant slowdown.

Credit Suisse, in a report on the Indian financial sector, said a credit crunch was looming, after two years of bank credit growth averaging 7 per cent annually, while growth in non-banking financial companies’ (NBFC) credit was over 20 per cent. Together, this had pushed annual credit expansion beyond 10 per cent.

The imminent slowing in NBFC loans could mean overall credit growth under 10 per cent; public sector banks continue to be constrained by capital and private banks by liquidity, it said.

The pace of credit growth moved into double digits at the beginning of this calendar year; it was steady till the end of September. Credit grew 6.5 per cent in September 2017 and began to gather steam after that. Year-on-year growth has been 12.2-13.5 per cent since April 2018, according to Reserve Bank of India data.

Private banks are already running a high credit to deposit ratio. Some of these already have it above 100 per cent. This limits the room for such lenders to accelerate credit disbursal.

However, this is not a uniform story. A senior IDBI Bank executive said some banks with a comfortable surplus might even revise their lending target upwards, taking the benefit of room vacated by finance companies and housing finance entities.

In fact, State Bank of India, the largest lender, has already indicated it would revise upward the credit growth target for 2018-19. 

Last week, Rajnish Kumar, its chairman, said his bank had capability to lend, with comfortable liquidity and capital base. About 12 per cent growth in credit was feasible for FY19 — the earlier official estimate was 10 per cent. Its credit to deposit ratio is 66.5 per cent.

Madan Sabanavis, chief economist at CARE Ratings, said the pace of credit expansion might lessen but would stay above 10 per cent. It will be concentrated in the retail (individual borrower) segment. Finance companies might borrow more but to manage liquidity, not so much for on-lending.