Healthy economic growth and budgetary support from the government should lift bank credit¹ growth by 200-300 basis points to 11-12% this fiscal (see chart 1 in annexure), an analysis by CRISIL Ratings shows. The estimate bakes in CRISIL’s forecast of over 7% gross domestic product (GDP) growth this fiscal.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “The biggest difference we expect this fiscal is the upshift in the corporate credit growth trajectory; we see it doubling to 8-9%. The Union Budget pegs public capex outlay at around Rs 7.5 lakh crore, a significant increase over last fiscal, with sharp focus on public infrastructure. The downstream impact of this on core sectors, along with the Production Linked Incentive (PLI) scheme announced for 13 key sectors, will be the drivers. Sectors that should see the maximum growth, given their industry dynamics, include metals and metal products, chemicals, engineering and construction.”

This is in sharp contrast to recent years when corporate credit, which accounts for 40% of bank credit, grew very slowly, even dipping into negative territory in fiscal 2021 (see chart 2 in annexure), as capex remained muted and banks chary of lending following asset-quality challenges.

Bank credit to micro, small and medium enterprises (MSMEs) could grow 12-14% this fiscal, riding on the multiplier effect from some pick-up in capex. This segment had seen higher credit growth in the past few quarters because of ECLGS². MSMEs are expected to play an important role in the government’s Atmanirbhar Bharat initiative, and will also benefit from the flow-through impact of schemes such as the PLI.

Home loans, which form the largest chunk of retail lending, will be a major driver of credit with residential purchases expected to continue at a solid clip this fiscal. At the same time, unsecured lending will also see some surge as lenders continue to find this segment attractive on a risk-adjusted return basis. Overall, the retail book growth will remain steady at 14-15% this fiscal.

Agriculture credit growth, estimated at 9-10% last fiscal on the back of a decent monsoon and a good harvest, is seen steady, with monsoon expected to be normal once again this fiscal.

The higher credit growth expectation is also supported by the improved resilience of the banking system.

Says Subha Sri Narayanan, Director, CRISIL Ratings, “India’s banking sector is structurally stronger today, and well-positioned to fund faster credit growth. Capital buffers are healthier with all public sector banks having a cushion of at least 100 bps over the regulatory requirement, while private banks continue to be solid on this score. Second, profitability metrics are at a 9-year high. Third, asset quality pressures are waning with sector-level gross NPAs likely declining ~500 bps from their 2018 peak, because of the improvement in the corporate book. All these factors, coupled with strong deposit growth, bode well.”

While the overall growth prognosis is positive — even on a larger base — there are factors that could individually or collectively impact our base-case estimates.

Three things that bear watching are: a fresh surge in Covid-19 cases; a prolonged Russia-Ukraine war that could impact many downstream sectors (some of which are already under pressure because of increased commodity prices); and, higher-than-expected slowdown in private consumption.

¹ Referring to domestic bank credit
² Emergency Credit Line Guarantee Scheme