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The modest recovery in credit growth seen earlier this month is unlikely to sustain, as rising rates, slow business growth and an uncertain macro-economic environment are expected to hit loan demand.
“We have lost all hope. Nothing is going to happen till the central government elections in April/May 2014; 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 clients.
In the beginning of August, credit growth rose to a five-month high of 16.6%, after sub-15% levels since the beginning of this financial year. Bankers attributed the revival to a strong demand for retail loans.
However, with lenders increasing loan rates, the demand for retail credit is likely to be hit. Housing Development Finance Corporation, India’s largest mortgage lender, and ICICI Bank increased their lending rates 25 basis points each, effective from Friday. The moves follow lending rate increases by other large and mid-sized private banks, including HDFC Bank, Axis Bank and YES Bank.
“The 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 estimate for this financial year to 13%, about 300 basis points lower than the credit growth in 2012-13.
Barclays Capital has said 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 situation 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, a Barclays Capital analyst, said in a note to clients.
