The much-awaited bank credit growth is gaining momentum with Q3 results of banks for FY22 looking far better than earlier. Banks are on strong footing with improved capital adequacy ratios (CAR) and asset quality. The RBI data of bank credit for January 2022 indicates an overall uptick when seen in the context of last two-year trends. The outstanding bank credit increased from Rs.101.05 trillion on January 31, 2020 to Rs.115.82 trillion as on January 28, 2022 posting year on year (YOY) growth of 5.9 percent during Jan 2020-21 increasing it to 8.2 percent in 2021-22 (Jan 2021-22). Even the sectoral credit growth is showing an uptick.

Credit growth to agriculture sector improved from 8.5 percent to 10.4 percent, industry from 0.7 percent to 6.4 percent, personal loan segment that includes housing, vehicle loans, credit cards etc. increased from 8.7 percent to 11.4 percent. But there is a nominal decline in credit growth to services sector from 8.1 percent to 7.3 percent because the high contact industry continues to be under stress. RBI has therefore provided separate allocations of TLTRO to banks to enable them to lend. The impact is yet to show up.

The positive trend continues to affirm credit growth at 7.9 percent YOY on February 11. 2022 compared to 6.6 percent recorded during previous year. On the other hand, the deposit growth is showing early signs of slow down posting growth of 9.1 percent on February 11, 2022 compared to 11.8 percent a year ago. Since deposit and credit growth are dependent on each other, they need to be seen together.

1. Demand for credit:

With union budget 2022-23 providing expansion of capex and infrastructure allocations, there will be spurt in demand for credit from industry. The Covid19 seemingly on waning path dissipating into an endemic, FY 23 can look for more active revival of the economy. Despite external sector risks – US Federal Reserve is well set to rise interest rates due to its inflation touching a 40 year high. But the domestic economy has already built up enough resilience to withstand its adverse impact, if any. The geopolitical tensions are expected to moderate with diplomatic channels coming into play.

The only worrying point is the spurt in crude oil prices that can exacerbate the inflationary trends in India creating compelling situation for RBI to intervene appropriately. But with its firm commitment to support growth as long as it is necessary to fight the impact of Covid19 stress, it may not easily sway its direction.

The corporate sector having consolidated their borrowings and deleveraged their balance sheets, they are now in a better position to revive expansion, capacity utilization and revival of capex cycle. With exports expanding fast, the corporate sector can create the elbow room for absorbing more bank credit. Much of the stressed credit brought under the restructuring framework – I and II allowed by RBI to withstand the Covid stress, it will create additional room for the entities to borrow.

Government having increased the limit of the Emergency Credit Line Guarantee Scheme (ECLGS) to Rs. 5 trillion along with extension of its availability until March 2023 or exhausting the limit whichever is earlier. These developments are set to create scope for demand for bank credit.

2. Banking system outlook:

Looking to better performance of banks – during post pandemic period, the Fitch Group-owned credit ratings agency – India Ratings (Ind-Ra) has revised its outlook on India’s banking sector to “improving” from “stable” stating the banking system’s health is at its best in decades.

According to the rating agency, the key financial metrics are likely to continue to show improvement in FY23, backed by strengthened balance sheets and an improving credit demand outlook with an expected commencement of corporate capex cycle. Though credit growth outlook is tapered down to 8.4 percent for FY22 down from its earlier stance of 8.9 percent, credit growth is expected to catch up to 10 percent in 2022-23.

Similarly, the global ratings firm Moody's has revised the outlook for the Indian banking system to ‘stable’ from ‘negative’ following its upgrade of India’s sovereign outlook. Besides receding asset quality concerns since the onset of the pandemic, declining credit costs as a result of improving asset quality is expected to result in better profitability. Also, the capital is expected to remain above the pre-pandemic levels making banks more robust with improved credit risk appetite.

In the backdrop of heightened economic activity and higher government spending on infrastructure, industry can potentially revive credit demand. With return to normalcy, retail credit demand is strong and corporate credit demand is expected to look up with revival of private sector capital expenditure prompting higher borrowings. The capex is expected to increase to Rs. 7 lakh crores each during FY22 and FY 23 compared to Rs.5.5 lakh crores in 2020-21 that is set to push up demand for credit. Another Rs.2 lakh crores can plough back into the economy due to productivity linked incentives (PLI) provided by the government.

3. Way forward:

Despite the improved CAR, government is set to infuse fresh capital of Rs.15000 crores in some of the weak banks to shore up their capital base to conform with Basel – III standards. With more and more commercial banks tying up with the non-banks to commence risk sharing to lend under the co-lending scheme allowed by RBI, the scope for credit growth will increase. The fintch companies are introducing many app-based lending products with algorithm driven risk assessment where the loans will get credited into the borrower accounts directly without manual intervention. The peer to peer (P2P) lenders becoming active, there is yet another channel entering the lending operations.

With MSME forums seeking simplification of lending schemes for opening up formal credit channels, banks are on a binge to innovate its credit sourcing, processing and delivery mode to make it more borrower friendly. Recently, the finance ministry had reemphasized the need for banks to be user friendly Taking a holistic view, the early signs of improved credit growth is expected to turn denser helping the economy sustain its growth trajectory notwithstanding the external sector and geopolitical risks. These risks are expected to moderate during FY23 creating a conducive environment to speed up revival of the economy.