Indian banks' credit growth to improve only gradually as pandemic drag lingers

 

Indian banks' credit growth to improve only gradually as pandemic drag lingers

• AuthorZia KhanGaurav RaghuvanshiCheska Lozano
• ThemeCredit AnalysisBanking
• SegmentBankingCorporations
• TagsIndia

Credit growth at India's commercial banks is likely to recover gradually in 2021, rather than quickly, as the country emerges from a deadly wave of COVID-19 and struggles to vaccinate the world's second-biggest population, analysts said.

CRISIL, an Indian unit of S&P Global Inc., said it expects bank credit to grow in a 9%-10% range for the fiscal year that started April 1. Fiscal support measures, such as enhanced spending and a credit guarantee plan announced by the government, combined with easy monetary policy, will support growth, CRISIL said.

Retail, agriculture and small- and medium-scale sectors will likely drive credit growth for banks, said Krishnan Sitaraman, senior director at CRISIL. "Corporate credit growth, while being expected to be better than last fiscal year, will still be muted as capex [capital expenditure] revival, which drives corporate credit growth, is still some way away, and in the interim many corporates are consolidating and deleveraging," he said.

An acceleration in private investment and capital expenditure is expected to help the economy make a sharp recovery, though "sub-normal monsoon [rains] and another surge in COVID-19 cases leading to localized or partial lockdowns pose downside risks," CRISIL said.

Backloaded recovery

After successfully controlling the initial COVID-19 outbreak in 2020, India was hit by a new variant of the virus in 2021, which quickly engulfed the country, stretching its health infrastructure and throwing business activity into turmoil. Infections peaked in May and are now on a declining trend, allowing many states to ease restrictions on mobility. Experts have warned of another wave of infections if the people and government let their guards down prematurely.

"We expect a backloaded recovery in credit growth, as the impact of the current wave of infections ebbs and faster progress on vaccination ensues," QuantEco Research economist Yuvika Singhal told S&P Global Market Intelligence. "We estimate close to 60% of the population receiving at least one jab by the end of 2021. Gradual easing of lockdown restrictions will help unleash demand and whet industry's appetite for credit, especially working capital amidst rising commodity/input prices."

Aggregate credit at Indian commercial banks grew 5.6% year over year in the quarter ended March 31, the slowest rate since the second quarter of 2017, according to data released by the Reserve Bank of India, or RBI, on May 28. Aggregate deposits in the March quarter expanded at 12.3% year over year, the fastest pace of quarterly growth since 2017.

This year's surge in infections is expected to have reversed some of the gains in economic activity made since the beginning of 2021. S&P Global Ratings said in a May 5 report that the second wave could shave as much as 2.8 percentage points from the country's GDP growth in fiscal 2022 in a severe scenario. The agency's baseline growth forecast for India's GDP was 11.0% in 2021 after India reported its first recession on record in 2020.

Despite the overall slowdown, credit deployment at the medium-sized enterprises, housing, auto and personal loans segments remained robust during the fiscal year ended March 31, according to the RBI data. Credit deployment at medium-sized enterprises was up 28.8% during the fiscal year, while housing credit saw 9.1% growth. Personal loans rose 10.2%.

Singhal said the turnaround in credit growth at the medium-sized corporates was driven by support measures from the government and the central bank.

Deleveraging

At the same time, several large companies deleveraged by repaying costly loans with funds raised from bond sales. That deleveraging dragged on first-quarter loan growth, in addition to the hesitation to make new investments as the economy still is recovering from COVID-19 infections, Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said in a June 8 note.

More than 1,000 listed companies cut their debt by more than 1.7 trillion rupees in the fiscal year ended March 31, according to State Bank of India's analysis. Refining, steel, fertilizers, mining and mineral products and textile companies alone cut debt by more than 1.5 trillion rupees during the fiscal year. Simultaneously, primary issuance of bonds increased by 9%, Ghosh said.

India's private sector banks have grown their credit faster than their state-run peers. Aggregate credit at private sector banks rose 9.1% year over year in the March quarter, compared with a 3.6% increase at their public sector counterparts. Deposit growth followed a similar trajectory.

Sandeep Upadhyay, CEO of Centrum Infrastructure Advisory, said loan pricing is a major factor helping private sector banks in beating public sector banks in extending more credit, in addition to their relatively better capital positions, efficient decision-making processes and risk-taking.

"The gap between lending rates of public sector banks and private sector banks has reduced, thereby making [private lenders] more competitive," Upadhyay told Market Intelligence. "The overhang of the [nonperforming assets] and the corresponding pressure of recovery continues to haunt [state-run banks] due to which the lending has been subdued despite a strong push from the government to encourage capex-based lending."