Bank credit growth to remain subdued at 5-6%

Deposit growth likely to ease to 12%

Bank credit growth is likely to remain subdued at 5-6% in the current financial year on weak loan demand and as debt market continues to offer better priced, according to a report.

Deposit growth is likely to ease further to 12% by end-March 2017, with banks cutting deposit rates and easing cash availability in the system, from 14.7% as on January 6, said the report by rating agency Icra.

“Credit growth is likely to remain muted at 5-6% at the end of the financial year 2016-17, as demand is yet to display a revival and the debt markets continue to offer more attractive pricing,” Icra’s Senior Vice-President and group head (financial sector ratings) Karthik Srinivasan said in the report.

He said deposit growth is likely to drop from the current levels of 14.7% to 12% at end-March 2017 as the improvement in cash availability would enable continued CASA withdrawals over the rest of the quarter.

Deposits of the banking system surged sharply after the note ban, from Rs 101.4 trillion as on September 30 to Rs 105.2 trillion on December 23, and further to Rs 105.8 trillion on January 6.

Accordingly, bank deposit on a Y-o-Y basis grew from 11.3% on September 30 to 15.2% on December 23, before easing to 14.7% on January 6, on the back of the sharp uptick in deposits in the corresponding reporting fortnight of January 2016.
Srinivasan said bonds and commercial paper (CP) continue to be important sources of funds for higher rated entities, as the flows into key investor segments such as mutual funds and insurance companies remain high.

Though the absolute CP issuances in the third quarter of the fiscal 2016-17 were lower than the previous two quarters, the CP outstanding recorded a 17.3% Y-o-Y increase at end-December 2016.

“Despite a fall in sequential bond issuance volumes, the corporate bonds outstanding witnessed a 19.1% Y-o-Y growth in December 2016,” he said.

Notwithstanding the continued growth in the amount outstanding of bonds and CP, the slowdown in the bank credit pulled down the aggregate lending growth from 12.7% in December 2015 to 8.3% Y-o-Y in December 2016.

“Accordingly, we do not expect any significant pick up in the aggregate lending growth from the current levels for the current fiscal,” Srinivasan said.