Care Ratings in a report earlier this month said the projected growth rate for bank credit is expected to be at 13-13.5 per cent for FY24, excluding the merger’s impact.

How has credit growth been so far in FY24?

As of September 8, 2023, bank credit grew by 19.81 per cent on a year-on-year basis to Rs 150.38 lakh crore, according to the RBI data. The number includes the impact of the merger of HDFC Ltd with HDFC Bank. Post-merger, the loan portfolio of the mortgage lender has become part of the banking system. However, excluding the impact of the merger, bank credit has grown by 15.08 per cent.

On a year-to-date basis, bank credit (including the impact of the merger) has risen by 8.6 per cent as of September 8, the RBI data showed.

In the first quarter of this fiscal, personal loans (housing and non-housing), which have supported overall credit expansion in recent years, recorded some deceleration but continue to grow well above the headline credit growth, the RBI’s recent State of the Economy report said.

In August, non-for credit grew by 15 per cent (excluding the impact of HDFC Ltd and HDFC Bank) as compared with 16 per cent a year ago, the latest RBI data showed. Personal loans growth decelerated to 18.3 per cent (y-o-y) in August from 19.4 per cent a year ago, due to moderation in credit to housing.

Credit to industry registered a growth of 6.1 per cent (y-o-y) in August as compared with 11.4 per cent in the same month of 2022. However, credit growth to the services sector accelerated to 20.7 per cent during the month from 17.4 per cent a year ago, primarily due to non-banking financial companies (NBFCs) and commercial real estate, the RBI data showed.

Why is credit growth expected to moderate in FY’24?

Crisil said moderation in bank credit will be on account of four factors.

1. Decline of gross domestic product

Gross domestic product (GDP) growth is expected to decline to 6 per cent on-year in FY24 from 7.2 per cent in the last fiscal. This lower GDP growth will have an impact on the overall credit growth of banks. Crisil’s GDP growth estimate is lower than the Reserve Bank of India’s (RBI) real GDP growth projection of 6.5 per cent.

2. Softening in commodity prices

The rating agency sees inflation easing in this fiscal due to some softening in commodity prices, which will reduce the overall demand for working capital loans. In FY2023, a significant part of the growth in wholesale credit (comprising corporates and micro, small and medium enterprises, or MSMEs) was driven by higher working capital demand in a high-inflation environment. As per the RBI, consumer price index (CPI) based inflation is projected at 5.4 per cent for 2023-24 compared to 6.7 per cent in 2022-23.

3. Robust bond market issuance

Bond market issuances have been robust in the first half of FY2023 with the change in interest rate environment. Consequently, bank credit’s substitution of debt capital markets, which also supported wholesale credit growth last year, especially in the first half, is not being seen to the same extent this year, Crisil said.

4. High-base effect

The fourth factor for lower bank credit growth will be the high-base effect due to the strong credit growth in fiscal 2023, especially in the second half. Within overall bank credit, growth in wholesale credit (nearly 60 per cent of overall credit) is likely to slow to 11-11.5 per cent this fiscal from a decadal high of 15 per cent. On the other hand, retail credit (which is nearly 28 per cent of overall credit), is expected to continue to grow at a healthy clip of 19-20 per cent in this fiscal, similar to last fiscal.

In a recent interview with The Indian Express, Federal Bank’s Managing Director and CEO Shyam Srinivasan said he expects the banking system’s credit growth to grow between 13 and 14 per cent in FY2024.

What is the expectation for growth in bank credit in FY25?

Crisil said in fiscal 2024-25, the bank credit growth will improve a tad to 13.5-14 per cent as economic growth picks up.

“In fiscal 2025, overall credit growth trends should see a turnaround and start inching up on the back of an expected improvement in GDP growth to 6.9 per cent. Within this, wholesale credit growth is likely to see a modest increase to 11.5-12 per cent, while retail should remain the key growth driver, expanding steadily at 19-20 per cent. Agriculture credit growth should remain range-bound at 9-10 per cent,” said Krishnan Sitaraman, Senior Director and Chief Ratings Officer, Crisil Ratings.

The revival in private industrial capex is slower than expected but higher capacity utilisation levels and capex announcements are encouraging from the perspective of a ground-level pickup in capex next fiscal.

On the services side, demand from non-banks should continue to support corporate credit growth as they are themselves seeing decent growth tailwinds, the rating agency said.

In the MSME segment, Crisil said, credit demand should be steady hereon given MSMEs’ role in the government’s Atmanirbhar Bharat initiative and the flow-through impact of the productivity-linked incentive scheme.

Demand for home loans (the largest sub-segment of retail credit) should be steady with increasing preference for home ownership and better affordability despite higher rates.

Unsecured loans (both personal loans and credit cards) are expected to grow faster, driven by greater digitalisation of financial transactions, a shift to organised credit, and increasing comfort with borrowing for discretionary spending.