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Credit offtake in the banking system is showing signs of a pickup at a time when interest rates are on the upswing. The year-on-year bank credit growth rate has crossed the 12 per cent level to 12.1 per cent as of May 20, 2022, as against 6 per cent growth in the same period of last year, according to the latest Reserve Bank data.
In absolute numbers, bank credit has gone up by Rs 13 lakh crore as of May 20 to Rs 120.27 lakh crore, as against Rs 6.08 lakh crore a year ago.
Bank credit to the services sector and personal loan segment has been growing faster than other segments. While credit offtake by the services sector has gone up by over Rs 3 lakh crore, personal loan segment, which includes housing, vehicle and credit cards, rose by over 3.4 lakh crore.
“Bank credit offtake has gradually improved in the recent months, supported by both resilience of the banking system and progressive normalisation of economic activity,” RBI Governor Shaktikanta Das said while unveiling the monetary policy last week. The RBI has jacked up repo rate by 90 basis points since May this year, making borrowing through the repo-linked lending rate (RLLR) costlier for borrowers. However, credit growth can hit the speed breaker if the economy doesn’t improve and the capex plan of the government and industry slows down, said an official of a bank.
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This (credit growth) was driven by the low-base effect, shift to bank borrowings due to high capital market rates, sustained rise in retail loans and higher working capital requirements owing to elevated inflation, according to CareEdge. Retail growth has been relatively high due to the improvement in the job market and economic activities.
After modest credit growth in recent years, the outlook for bank credit growth is expected to remain positive due to economic expansion, rise in government and private capital expenditure, rising commodity prices and retail credit push. “The medium-term prospects look promising with diminished corporate stress and a substantial buffer for provisions. CPI inflation too is trending up, which is likely to add to the credit growth,” it said.
On the other hand, rising rates could offset this growth to some extent by curbing the demand for credit, CareEdge said. The retail loan segment is expected to do well as compared with the industry and service segments.
Positive outlook
After modest credit growth in recent years, the outlook for bank credit growth is expected to remain positive due to economic expansion, rise in government and private capital expenditure, rising commodity prices and retail credit push.
The ongoing Russia-Ukraine war is likely to have a limited impact on the credit growth in India. Meanwhile, any subsequent Covid-19 variants, if severe, could lead to lockdowns and cause a slowdown in the economy.
With the introduction of the external benchmark lending rate, the rate of transmission will be faster and higher.
In addition to that, the deposits in the banking system have already started moving up from the extremely low levels, and this will again be transmitted to higher MCLR for wholesale lending.
“The sensitivity of interest rate over aggregate demand has increased in a meaningful way. Therefore, a faster and higher transmission of interest rate could become onerous for a section of the borrowers. The situation will aggravate if the real income does not improve,” said a report by India Ratings.
On the other hand, deposit growth has remained sluggish at 9.3 per cent (Rs 14.07 lakh crore) as on May 20 this year, as against 9.7 per cent a year ago even as interest rates started moving up.
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