HDFC merger may lead to 300 bps deceleration in credit demand: Report

The $40-bllion merger of the HDFC twins may lead to a 300-basis points deceleration in credit off-take to 13-13.5 per cent this fiscal from a tad over 15 per cent last fiscal, a report said.

Credit off-take grew 15.4 per cent on-year to Rs 140.2 lakh crore for the fortnight to June 16, driven by personal loans and lending to non-banks, up from 13.2 per cent a year ago.

Meanwhile, deposits also saw a healthy growth at 12.1 per cent on-year in the same fortnight partly supported by the withdrawal of the Rs 2,000 bank notes.

This had the spread between credit and deposits growth dropping to 337 basis points (bps) in the reporting fortnight from 875 bps in November 2022, which was the largest in recent years, Care Ratings said in a note.

In absolute terms, for the trailing 12 months, deposits expanded by Rs 20 lakh crore while incremental credit expanded by Rs 18.7 lakh crore from Rs 14.1 lakh crore, the note said.

Even though forecasting for a healthy growth in demand for credit, given the economic expansion, rise in capital expenditure, the PLI scheme, and retail credit push, along with sectoral credit growth expectations, the agency expects credit growth to decelerate to 13-13.5 per cent in FY24, excluding the impact of the merger of HDFC with HDFC Bank. If the merger is included, growth is likely to be higher by around 3 per cent, the agency said.

The agency expects personal loans will continue to drive credit growth followed by industrial and services segments. Falling inflation will be another growth driver.

On the interest rate front, the short-term weighted average call money rate, which is the best reflection of the interest rate, stood at 6.1 per cent for the reporting fortnight compared to 4.51 per cent in the trailing 12 months fortnight ending June 17, 2022.

The increase can be attributed to elevated policy rates. Yet the weighted average call money rate is much lower than the 6.69 per cent as of May 4, 2023, primarily due to the liquidity surplus in the system since the past couple of months.

The outstanding liquidity stood at Rs 0.85 lakh crore as of June 16, 2023, as compared with Rs 2.4 lakh crore as of June 2, 2023 and Rs 2.3 lakh crore as of June 17, 2022. The liquidity in the banking system has improved compared with a deficit in the second half of FY23.

Meanwhile, the outstanding credit to non-banks and mutual funds has further come down to just 11 per cent of total advances by banks.