Bank credit growth set to drop to 6.5-7% in FY20

The growth in bank credit is likely to decelerate to 6.5-7% during fiscal 2019-20 from 13.3% in the previous fiscal.

According to a study by rating agency ICRA, incremental bank credit has increased by only Rs 80,000 crore during FY20 till December 6, 2019, to Rs 98.1 lakh crore,

in contrast to the rise of Rs 5.4 lakh crore and Rs 1.7 lakh crore during previous corresponding periods of FY19 and FY18 respectively.

Even in a high growth scenario, whereby incremental credit rises to Rs 6.5 lakh crore to Rs 7 lakh crore during H2FY20 from Rs 5.7 lakh crore during H2FY18 and Rs 7.2 lakh crore during H2FY19, ICRA Ratings projects a 40-45% year-on-year decline in incremental net bank credit to Rs 6.3 lakh crore to Rs 6.8 lakh crore during FY20 from Rs 11.9 lakh crore during FY2019, while somewhat comparable to Rs 6.5 lakh crore in FY2018. This will translate to a considerable deceleration in Y-o-Y bank credit growth to 6.5%-7% during FY20 from 13.3% during FY19 and 10.5% during FY18, the rating agency said in a statement.

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 FY2020.

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 seven months of FY2020.

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 7 months of FY2020. 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 and similar to Rs 4.6 lakh crore during the previous corresponding period of FY2019.

The overall deposit base increased to Rs 131.1 lakh crore as on December 6, 2019, a Y-o-Y growth of 10.3% and credit to deposit ratio of 75.8.