Bank credit is seen growing at around 15% per annum in fiscals 2023 and 2024, riding on broad-based economic recovery and stronger, cleaner balance sheets that allow lenders to expand credit, according to ratings agency Crisil.

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, the ratings agency says.

In the past five 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. Crisil expects their credit growth at 12% over this fiscal and next — still lower than the 17% expected for private banks.

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 Crisil.

"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," says Krishnan Sitaraman, senior director and deputy chief ratings officer, CRISIL Ratings.

"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," Sitaraman adds.

Retail credit (26% of total advances) is expected to grow the fastest at 17-19%. Demand for home loans, the largest sub-segment, is expected to stay robust despite rising interest rates and real estate prices, as affordability remains better than in the past.

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, the ratings firm says.

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

“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,” says Subha Sri Narayanan, director, CRISIL Ratings.

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