'Loan growth to pick up to 15% in FY18'

'Loan growth to pick up to 15% in FY18'

Credit growth may pick up to 15% in FY18 from 9% in FY17 with the demonetisation shock tapering off and rate cuts on the anvil, said Bank of America-Merrill Lynch (BofA-ML) on Tuesday.
“We expect loan growth to pick up to 15% in FY18 from 9.1% in FY17 as Reserve Bank’s OMOs (open market operations) worth Rs 1.10 trillion in the second half of the year will likely push up loan supply to close the credit gap to pull down lending rates by up to 25-50 bps by September and spur loan demand,” the Wall Street brokerage said in a report here.

However, according to the RBI, credit growth had slipped to the lowest level since Independence in FY17, falling to paltry 5.1%.

The massive decline, according to domestic rating agency Crisil, was due to massive drop in bank borrowings by top companies as top 1,000 companies borrowed a little over Rs 1 trillion less in FY17 over FY16, out of which top 10 alone borrowed Rs 33,571 crore less, according to a Crisil report on Monday. According to BofA-ML, Re 1 of OMO generates Rs 4 of loan supply. On top of this the note ban also added temporary liquidity to the tune of Rs 4 trillion to banks.

The brokerage estimates the RBI to do Rs 1.1 trillion worth of OMOs in the second half of the current year, which will pull down the 10-year G-secs yield due to excess G-sec demand.

On rate cuts, the report expects the RBI to lower repo rates by 25 bps at the August 2 policy to signal a bank lending rate cut before the ‘busy’ industrial season commences in October.

Also, the ongoing measures to address bad loans and bank recapitalisation will ease capital constraints on lending.