Banks stare at slowest credit growth in a decade

Y-o-Y credit growth for the banking industry has already plunged below 17% in Aug 2012, is expected to moderate further in coming months

Indian banks' loan book is set to grow at its slowest pace in a decade this financial year as corporates continue to shy away from borrowing in the current uncertain macro-economic environment.

The year-on-year credit growth for the banking industry has already plunged below 17 per cent in August, 2012 and is expected to moderate further in coming months, bankers and industry analysts said.

"We believe the moderation in growth is likely to be accentuated...We could see loan growth for 2012-13 moderate to 14 per cent, which would be a 14 year low," Rajeev Varma and Veekesh Gandhi, analysts with Bank of America Merrill Lynch, wrote in their note to clients.

Bankers were not willing to comment on record because of the sensitivity of the issue but on condition of anonymity they agree that outlook on this year's credit growth is grim and expanding their loan portfolios in the second half will remain a challenge.

"There is a slowdown undoubtedly. There is hardly any growth in corporate loans. Even the demand for working capital finances is drying up. Even if the Reserve Bank of India (RBI) chooses to cut rates on Monday, it will not boost credit demand as business sentiments continue to remain negative. Some relaxation in policy rates will only improve market sentiments," said an executive director of a Mumbai-based public sector bank.

While few bankers expressed optimism that loan demand will not decline further in the second half, they agree the rate of growth is likely to be at its slowest in past nine to ten years.

"RBI has guided by 17 per cent growth but we expect the actual growth will be in the range of 15-16 per cent. Even then it will be unfair to say that the growth is slow given the base of the bank credit. But if you compare it with past growth rates it may be lowest in last nine or ten years," said a senior official with a foreign investment bank.

The only silver lining for banks is likely to be the retail loan demand, which has not declined significantly despite high interest rates. As per data from the RBI, at the end of July 2012, the personal loans category that includes housing, education and vehicle loans grew by 15 per cent, almost at the same pace as compared to the annual growth witnessed last year.

"Retail loan demand is seeing a revival on base effects and pick-up in home loans partially driven by return of ICICI Bank in this segment. The under penetration of retail products and availability of third party vigil from retail credit bureau is seeing better quality of credit being underwritten and hence growth is following," Bank of America Merrill Lynch analysts said.

"Moreover, recent rate cuts by many banks in home loans and auto loans by 25-50 basis points on retail products may also spur demand ahead," the analysts noted.

However, low demand for loans from the corporate and SME (small and medium enterprises) sectors is likely to drag credit growth this year, they added.