New Delhi: Growth in bank credit may decelerate sharply and end up at 6.5% in this financial year, according to a report published by ICRA on Thursday.
This would be lower than the 13.3% growth recorded in FY ’19 and 10.5% recorded in FY ’18, according to the rating agency’s estimate, in what is the latest confirmation of a muted investment environment and how a credit squeeze has dragged down GDP growth.
Bank credit growth is a key financial metric that is indicative of how well an economy is expanding.
“The incremental bank credit has increased by only Rs. 0.80 trillion during FY ’20 till December 6, 2019 to Rs 98.1 trillion, in contrast to the rise of Rs 5.4 trillion and Rs 1.7 trillion during previous corresponding periods of FY2019 and FY2018 respectively,” ICRA’s report notes.
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“Even in a high growth scenario, whereby incremental credit rises to Rs 6.5-7.0 trillion during H2 FY ’20 from Rs 5.7 trillion during H2 FY2018 and Rs 7.2 trillion during H2 FY ’19, ICRA Ratings projects a 40-45% Y-o-Y decline in incremental net bank credit to Rs 6.3-6.8 trillion during FY ’20 from Rs 11.9 trillion during FY ’19, while somewhat comparable to Rs 6.5 trillion in FY ’18,” the report adds.
India’s credit growth story was severely impacted by the failure of infrastructure financier IL&FS in September 2018. The collapse of the quasi-state behemoth put a harsh spotlight on the country’s NBFC sector, which had for some time been shouldering the credit growth burden of the banking system.
“A shift of large borrowers such as non-banking financial companies (NBFCs) and housing finance companies (HFCs) to the banking system for their funding requirements, had boosted bank credit growth in FY2019. However, factors such as muted economic growth, lower working capital requirements, as well as risk aversion among lenders, have compressed the incremental credit growth in FY ’20,” the rating agency’s assessment points out.
“The recent data on bank credit released by the Reserve Bank of India (RBI) reveals that 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 FY ’20. Within services, the credit outstanding to NBFCs has increased. However, the decline in trade credit and other services (which also includes HFCs) has resulted in the overall contraction in credit outstanding to the services segment in 7M FY ’20.”