Retail, farm segments set to drive credit growth in FY23: CRISIL

Strong domestic demand, healthier corporate balance sheets, and a well-capitalised banking sector are expected to steer India towards a 7 per cent gross domestic product (GDP) print in 2022-23.

This is in sharp contrast to the past few years, which were challenging for banks owing to high loan delinquencies. But now, with most of the legacy stress in the corporate loan book recognised, banks have stronger, cleaner balance sheets, allowing them to shift focus back to credit expansion.

Disbursements by banks are likely to outpace those by non-banking financial companies (NBFCs), at 13-15 per cent on-year this fiscal year, vis-à-vis 10-13 per cent in the case of NBFCs.

A large part of this growth will be spurred by the retail segment. In fact, bank credit to the retail segment, which was up 11.5 per cent on-year as of October 2022, is projected to accelerate, rising 17-18 per cent on-year in the current fiscal year, primarily owing to rising demand for home loans.

Also supporting bank credit growth is wholesale credit to NBFCs and trade under the services segment. Wholesale credit, which rose 7.1 per cent as of October 2022, is forecast to gain pace as well over the tail end of the year, thereby logging 10-12 per cent for the fiscal year.

In the case of industries, growth has been buoyed by a pick-up in credit in segments such as basic metals and metal products, which have seen deleveraging in the past few fiscal years, additionally aided by the government’s production-linked incentive scheme and improvement in capacity utilisation.

The other sector ensuring a sustained loan growth trajectory is agriculture, which is expected to gain momentum from an 8.8 per cent increase till October 2022 to end the fiscal year with a rise of 10-12 per cent, supported by priority sector lending targets of banks and increase in agri-credit target.

Deposits, though, have lagged credit growth in recent months. With surplus liquidity now normalising, the ability of banks to garner deposits to meet credit demand will remain a key monitorable.

Meanwhile, asset quality, which improved from a high of 11.3 per cent as of March 2018 to 6 per cent as of March 2022, is expected to rise 5-5.4 per cent this fiscal year. This would primarily be on account of lower slippages, economic recovery with the subsiding of the Covid-19 pandemic, higher credit growth, and expectation of recoveries via the National Company Law Tribunal and National Asset Reconstruction Company route.

Also, gross non-performing assets have improved across segments, with that of the retail segment expected to be the lowest at 1.7-1.8 per cent during this fiscal year. These will percolate through profitability.

Banks’ net interest margin should expand in the near term despite credit costs expected to normalise. Supported by these tailwinds, return on assets could rise past 1 per cent this fiscal year.