Bank credit is seen growing ~15%¹ per annum in fiscals 2023 and 2024 (see chart 1 in annexure), riding on broad-based economic recovery and stronger, cleaner balance sheets that allow lenders to expand credit.

The estimate factors an expected ~7% increase in gross domestic product (GDP) this fiscal, as well as impetus to credit growth from the government’s infrastructure push, higher working capital demand in a high-inflation environment, and some substitution of debt capital market borrowings. While GDP growth could see some moderation next fiscal, this would be on a higher base, thereby having limited impact on credit demand.

In the past 4-5 years, asset quality challenges resulting in higher gross non-performing assets (NPAs), referral to the prompt corrective action (PCA) framework in a number of cases, and limited capital buffers have constrained credit growth, particularly for public sector banks (PSBs). Now, after a significant clean-up and strengthening of balance sheets, supported by substantial equity infusion, PSBs are eyeing higher growth. As a result, their credit growth is seen at ~12% over this fiscal and next — still lower than the ~17% expected for private banks.

The segmental composition of growth is likely to be different. While this fiscal is likely to be driven more by the retail and micro, small and medium enterprises (MSME) segments, corporate credit could be a larger contributor next fiscal.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “Corporate credit (45% of overall credit) may grow at a 2-year compound annual growth rate (CAGR) of 10-12% up to March 2024, after a mere 3% between fiscals 2019 and 2022. This year, additional working capital requirement due to high inflation and move from the bond markets to bank loans, given the interest rate movements, are driving growth, though off a low base. On the other hand, next fiscal should see a revival in private sector capex, which then will become the key driver for higher corporate credit growth.”

Retail credit (26% of total advances) is expected to grow the fastest at 17-19% (see chart 2 in annexure). Demand for home loans, the largest sub-segment, should stay robust despite rising interest rates and real estate prices, as affordability remains better than in the past. Economic recovery and increased preference for home ownership also support the segment. Unsecured retail loans, which were muted during the pandemic, have started to grow again as this remains a lucrative segment for banks. However, the impact of a continued rise in interest rates on retail credit demand needs to be seen.

The MSME segment is expected to grow at a reasonable clip of 16-18% over this fiscal and the next, as given the role of MSMEs in the government’s Atmanirbhar Bharat initiative, and the flow-through impact of schemes such as the Productivity Linked Incentive scheme, demand should sustain.

Agriculture credit growth is expected to hover around 10%, supported by reasonably normal monsoon and harvest.

While credit growth in fiscal 2023-to-date has printed higher, the second half should see this moderate somewhat and touch ~15% levels for the full fiscal given the base effect of rapid growth in the second half of fiscal 2022. In fact, in fiscal 2022, over 90% of the incremental credit was added in the second half of the year.

Says Subha Sri Narayanan, Director, CRISIL Ratings, “What will be a key monitorable in this high credit growth environment is whether deposit growth can keep pace. The past few months have seen a trend reversal with credit growth running ahead of deposit growth. Also, surplus liquidity in the banking system is normalising. Therefore, banks may now have to raise deposit rates at a faster pace, which we are already seeing. In fact, with competition for deposits also set to intensify, some banks may have to resort to higher-cost wholesale deposits, which may impinge on their margins, though profitability for the sector should be still higher than last fiscal.”

Downside risks to the credit growth estimates include lower-than-expected GDP growth; further sharp, unanticipated rise in interest rates; high inflationary pressures and slowdown in private consumption.

¹ Excluding the impact of the potential merger of a large housing finance company with a bank, which would result in ~200 bps higher reported growth