Slowdown To Compress Incremental Credit Growth In FY20: ICRA
Non-banking financial companies (NBFCs) and housing finance companies (HFCs) to the banking system for their funding requirements had boosted bank credit growth in 2018-19.
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Muted economic growth, lower working capital requirements and risk aversion among lenders have compressed the incremental credit growth in current financial year (April 2019 to March 2020), according to investment information agency ICRA.
A shift of large borrowers like non-banking financial companies (NBFCs) and housing finance companies (HFCs) to the banking system for their funding requirements had boosted bank credit growth in 2018-19. But the contraction in incremental credit outstanding to services as well as industrial segments offset the entire growth in credit to the retail segment during the first seven months of FY20.
Within services, credit outstanding to NBFCs has increased. However, the decline in trade credit and other services (which also includes HFCs) has resulted in the overall contraction in credit outstanding to the services segment in 7M FY20.
A sizeable portion of the growth in retail credit is also driven by the purchase of retail loan portfolios of NBFCs and HFCs by banks.
ICRA said the year-on-year growth in bank credit is expected to decelerate sharply to 6.5 to 7 per cent during FY20 from 13.3 per cent during FY2019, following limited incremental credit growth during FY20 till date.
The incremental bank credit has increased by only Rs 80,000 crore till December 6 to Rs 98.1 lakh crore in contrast to the rise of Rs 5.4 lakh crore and Rs 1.7 lakh crore during previous corresponding periods of FY19 and FY18 respectively.
Even in a high growth scenario, whereby incremental credit rises to Rs 6.5 lakh crore to 7 lakh crore during H2 FY20 from Rs 5.7 lakh crore during H2 FY18 and Rs 7.2 lakh crore during H2 FY19, ICRA Ratings projects a 40 to 45 per cent year-on-year decline in incremental net bank credit to Rs 6.3 lakh crore to 6.8 lakh crore during FY20 from Rs 11.9 lakh crore during FY19 while somewhat comparable to Rs 6.5 lakh crore in FY18.
On the positive side, incremental deposit accretion of the Indian banking system at Rs 5.3 lakh crore remained higher than credit growth till December 6 and similar to Rs 4.6 lakh crore during the previous corresponding period of FY19.
The overall deposit base increased to Rs 131.1 lakh crore as on December 6, a year-on-year growth of 10.3 per cent and credit to deposit ratio of 75.8.
Apart from the muted increase in currency in circulation, the build-up in the deposit base of the banks could be attributed to factors such as lower increase in asset under management (AUM) of debt mutual funds as well as higher liquidity maintained by various corporate entities.
Overall ICRA expects the year-on-year deposit growth to remain higher than credit growth at 8.4 to 9 per cent for FY20 but it will be lower than 10 per cent witnessed during FY19 and higher than 6.7 per cent of FY18, that is the year after demonetisation.
Because of high incremental deposit growth and lower incremental credit growth, the daily average liquidity surplus in the banking system has remained unprecedently high at Rs 1.26 lakh crore during Q2 FY20 and further increased to Rs 1.95 lakh crore during October and Rs 2.4 lakh crore during November 2019.