Bank credit growth likely to fall to 58-year low in FY20

Bank credit growth may decelerate to 6.5-7 per cent in the current financial year, compared to 13.3 per cent in 2018-19, which will be the lowest in the last 58 years, an ICRA report says. A major reason for a decline in the credit growth across three out of four sectors -- agriculture, industry, services and retail loans -- is low capital requirements by companies and risk aversion among banks.

Highlighting the grim economic situation, the credit rating agency report says even if the economy performs exceptionally well and sees credit growth to Rs 6.5-7 lakh crore in the second half, the incremental bank credit is projected to see a 40-45 per cent YoY decline to Rs 6.3-6.8 lakh crore during FY2020 from Rs 11.9 lakh crore in FY19. "This will translate to a considerable deceleration in YoY bank credit growth to 6.5-7 per cent during FY20 from 13.3 per cent during FY19 and 10.5 per cent during FY18," says the report.

The incremental bank credit has increased by just Rs 80,000 crore during FY20 till December 6, in contrast to the rise of Rs 5.4 lakh crore and Rs 1.7 lakh crore in FY2019 and FY2018 (till December), respectively.

Explaining the rationale behind low credit growth, the ICRA report says there has been a shift in capital requirement due to the economic slowdown and risk-taking capabilities of banks. In FY19, a major portion of bank credit had gone to NBFCs and HFCs, which in turn saw a credit squeeze in FY20, thanks to the ongoing crisis in the NBFC sector.

"Factors such as muted economic growth, lower working capital requirements, as well as risk aversion among lenders, have compressed the incremental credit growth in FY2020," the report says.

The recent data on bank credit released by the Reserve Bank of India (RBI) reveals the contraction in incremental credit outstanding to the services as well as the industrial segments, offset the entire growth in credit to the retail segment during 7M FY2020, the report said.

The report adds that a sizeable portion of the growth in retail credit is also driven by the purchase of retail loan portfolios of NBFCs and HFCs by banks.

On the positive side, the incremental deposit accretion of the Indian banking system at Rs 5.3 lakh crore remained higher than credit growth till December 6, 2019.  Overall YoY deposit growth is also expected to remain higher than credit growth at 8.4-9 per cent for FY20, but it will be lower than 10 per cent witnessed during FY19 and higher than 6.7 per cent of FY2018, i.e. the year after demonetisation.

The rating agency said as the banks have continued to cut the deposit rates since the beginning of the FY2020, the cost of funds could decline further in the next one year, which will translate into lower lending rates to spur up the credit growth.

India's economy is facing a major crisis, with the country's GDP on a continuous downward spiral. The GDP in the September quarter of this fiscal declined to 4.5 per cent, recording an over six-year low, mainly impacted by a slump in manufacturing output, which contracted by 1 per cent. The economic growth moderated from the 5 per cent rate in the April-June quarter of this fiscal and 7 per cent in the July-September quarter of 2018.