Crisil Report: Credit growth expected to pick up in next fiscal

FE Bureau
bank credit growth, demand for retail loans, economic growth, Crisil, retail lending, Corporate loans, bank credit, securitisation, reserve bank of india, RBI, cash reserve ratio, CRR

The worst may be over for bank credit growth as the demand for retail loans could pick up pace on the back of a revival in economic growth in the next fiscal.

According to Crisil, bank credit growth is set to bottom out and rise 200-300 basis points in the next fiscal as retail lending is expected to pick up. Corporate loans are expected to clock anaemic growth in the current fiscal.

The rating agency expects the share of retail loans in the total bank credit is expected to rise 400 bps to 28% between March 2019 and March 2021. As economic activity gradually picks up pace and demand for retail loans revives, the next fiscal is expected to be better for credit growth. "The prolonged slowdown in bank lending may be bottoming out this fiscal, with gross credit offtake set to rise 8-9% on year in fiscal 2021, a good 200-300 bps over the likely growth of 6% this fiscal," Crisil said in a note.

Measures like securitisation and other supportive steps taken by the Reserve Bank of India (RBI) would contribute to the revival, so will the strong growth in lending by private sector banks next year.

As for this fiscal, some growth momentum is expected in the fourth quarter after a subdued three quarters - due to traditional fiscal year-ending growth. RBI's move to exempt banks from cash reserve ratio (CRR) requirement for incremental credit to certain sectors for up to five years will also support lending, the report said. Commenting on the analysis, Crisil director Subha Sri Narayanan said: "Despite improvement in capital position and asset quality, PSBs are expected to witness slower growth due to transition and operational challenges, on account of the planned merger of 10 of them into four. But growth should bounce back over the medium term when there would be fewer, but larger and stronger banks."

Incremental net domestic credit this fiscal up to December 2019 has been just a fifth of what it was a year ago. Lending to the retail segment and non-banking financial companies (NBFCs) showed good growth, while credit to corporates (ex-NBFC) and micro, small, and medium enterprises declined.

Retail credit should continue to grow at a healthy clip of 16%, next year, supported by sustained demand for unsecured loans, muted business growth for non-banks as well as steady levels of pool purchases. Securitisation transactions through the direct assignment route have surged almost 40% to Rs 59,000 crore in the first half of FY20, compared with Rs 42,700 crore a year ago.

According to Crisil senior director Krishnan Sitaraman: "Structural shifts such as favourable demographics, rising propensity to leverage for personal consumption, increase in availability of financing, and reasonable risk-adjusted returns for lenders, will continue to support retail lending."

The share of retail loans in total bank credit is expected to rise 400 bps to 28% between March 2019 and March 2021. On the other hand, corporate lending (excluding lending to NBFCs) is expected to remain subdued in fiscal 2020, and thereafter, witness a slight uptick. Overall growth in this segment, however, is expected to remain low at 2-3% in fiscal 2021 causing its share in total bank credit to fall 300 bps to 48% between March 2019 and March 2021. That's because continuing low capacity utilisation in the economy would keep private investments muted in the near to medium term, and the government's mega push to infrastructure will translate into credit growth only gradually.

Risk aversion among lenders is also expected to remain high, given the economic slowdown and bad loan issues of the past. Credit to MSMEs, which has remained flat so far this fiscal, will receive some fillip from the RBI's recent decision to exempt banks from CRR requirement for incremental credit to this segment as well as the extension of the one-time restructuring scheme by a year, the report said.

Overall growth in credit to MSMEs, however, is expected to remain range-bound at 5-7%. Agricultural credit may see some uptick with the government's ambitious lending target of Rs 15 lakh crore for fiscal 21, up from Rs 13.5 lakh crore in fiscal 20 (12% higher). However, how the monsoon pans out in the next fiscal will be key. The dichotomy in growth within banking groups will persist. Private banks will continue to lead with 15% credit growth, and gain further market share from PSBs. Their share is expected to rise 400 bps by March 31, 2021, over March 31, 2019, it added.