Credit growth likely to be muted at 8% this fiscal: ASSOCHAM Study

Slowdown in economy coupled with high stress level in the banking sector is expected to restrict credit growth at around 8 per cent during the current fiscal despite government's thrust on loan expansion, reveals the ASSOCHAM study.

However, this would be slightly better than the five decade low growth of 5.1 per cent in non-food credit recorded for the financial year ended March 2017.

Growth in the credit this year would be mainly driven by the retail segment and farm loan. Expansion could also be contributed by the some of industry related to infrastructure segment if they pick up in the second half of the current fiscal, adds the ASSOCHAM study.

 

There could be some uptick in lending towards the micro, small and medium enterprises (MSME) sector with government asking banks to increase their exposure to the sector as they are one of the largest employers.

One of the objectives of the staggering Rs 2.11 lakh crore capital infusion programme announced by the government in October is to enable banks to enhance lending to industry especially MSME by strengthening balancesheets of NPA-ridden public sector banks (PSBs).

Non-performing assets (NPAs) of public sector banks have increased to Rs 7.33 lakh crore as of June 2017, from Rs 2.78 lakh crore in March 2015.

Notably, corporate sector are not getting loans from banks as lenders have become risk averse due to mounting NPAs. To make matter worse, companies with good ratings are tapping market as rates are cheaper in the bond markets.

Only segments which are witnessing healthy growth are personal and agriculture credit with jump of over 10 per cent.

This situation is going to continue more or less the same for the rest of the financial year limiting credit growth between 8 and 9 per cent for the entire fiscal even after taking into account acceleration during second half of the financial year referred as busy credit season, and proposed strengthening of balance sheets of PSBs.

Recapitalisation would have limited impact on credit growth and that too would be restricted to the last quarter of the ongoing fiscal. However, this would have greater ramification in the next fiscal.

Despite, Moody's upgrade of Indian economy by a notch to Baa2, it is still not out of the woods of demonetisation and implementation of Goods and Services Tax (GST). Even the latest numbers are not very encouraging. For example, credit growth expanded by 6.6 per cent in October as compared with an increase of 6.7 per cent in the same month previous year.

The credit offtake rose at a lower pace of 6.1 per cent in the previous month as compared with an increase of 10.8 per cent in September, 2016. The growth was slightly lower at 5.5 per cent in August as compared with an increase of 8.2 per cent in the same month previous year. In July, non-food bank credit growth of banks has moderate growth of 5.3 per cent as compared to a rise of 8.3 per cent in July 2016.

As regards June, it was below 5 per cent at 4.8 per cent as against 7.9 per cent same month previous year. This is as per the RBI data on sectoral deployment of bank credit collected from select 41 scheduled commercial banks, accounting for about 95 per cent of the total non-food credit deployed by all scheduled commercial banks.

After struggling at just under 10 per cent for almost a year, credit growth fell to under 5 per cent starting November 2016 and since then it has not been able to cross double digit on sustained basis.

It is to be noted that the buoyant stock market and low interest rate in the corporate debt market have together lowered dependence of borrower especially corporates on bank finances. However, some of these factors have played out and dependence of corporates on bank finances would witness a rise.

What could give fillip to credit growth is further softening of interest rate by the Reserve Bank of India (RBI). It is expected that interest rate will come down in the next couple of months pushing loan demand during the remaining months of the financial year.

Loan demand is an important driver of the economy and moderation of this does not augur well for the broad based GDP growth which is likely to remain below 7 per cent for the financial year 2017-18.

As per the RBI's expectation, the GDP is to grow at 7.1 per cent in the third quarter and scale up to 7.7 per cent in the fourth quarter, to give a yearly average of 6.7 per cent. GDP recorded a growth of 5.7 per cent, lowest in three years, in the first quarter ended June. It accelerated to 6.3 per cent in the following quarter.

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