Decelerates 1.3% during April 2017 to September 15, 2017; year-on-year growth at multi-year low of 6.8%
Bank credit continues to grow at an all-time low for the second consecutive year, reflecting the lack of private investment in an economy that is slowing down.
Bank credit for the second quarter grew at 6.8% over the previous year, riding on the back of retail loans, home loans and unsecured loans like personal loans and credit cards.
In fact, the year-to-date comparison presents a negative growth. From April 2017 to September 15, 2017, bank credit has decelerated by 1.3%.
Reliance Securities said in a report, “Banking system credit growth continues to remain at a multi-year low of 6.8% in the fortnight ended September 15, 2017. Year-to-day growth in loan book stood at -1.3%, which clearly indicates muted growth in loan book during the first half of 2017-18, especially for corporate-focused public and private sector banks.”
Since the money market rates are at least 1% to 2% lower, most of the bank credit book has shifted to the investment book, with banks investing in the corporate bonds of their clients.
Further, the sector has got negatively impacted by a sharp rise in bond yields due to deteriorating conditions on the fiscal deficit front, both at Centre and state level. “Fiscal deficit of the central government touched 96.1% of the Budget Estimate for this fiscal at the end of August 2017, as the government continued its spending spree to support the economy. Resultantly, the benchmark G-Sec bond yield jumped to 6.66% by the end of the second quarter compared to 6.51% by the end of first quarter,” the report by Reliance Securities said.
Retail continues to fuel growth and could just become the next engine to fuel bad loans. Morgan Stanley said in a report, “Earnings trends at corporate lenders should remain weak given the slow loan growth, muted margins over the previous year despite some relief from capital raising and savings bank account rate cuts.”
“We expect slippages to trend lower, but provisions will remain elevated – we have built in much higher provisions for SBI and ICICI Bank, since we expect them to use capital gains from insurance stake sales to increase coverage,” the Morgan Stanley report said.
Kotak Securities said in a report, “Our study of private capex does not suggest an improvement in the corporate loan growth as fresh capex is still elusive with the focus still on deleveraging the balance-sheet at this point in time.”
This means that revenue growth is weak when core business fails to pick up.
The rise in yields following RBI’s fears of rising inflation and perhaps its inability to cut rates further rose the yields during the quarter by close to 5 to 8 basis points further eroding the profits of banks.
“Treasury income is likely to remain weak for the overall sector given the recent uptick in the yields. Weak revenue growth led by slower loan growth, NIM pressure year-on-year lower contribution from investment gains and high provision for bad would remain a drag on earnings growth of banks,” the Kotak Securities report said.
BANKING WOES
- Deposit accretion, lower lending rates have led to drop in margins
- Banks are shunning credit for corp bonds
- The sector has been negatively impacted by a sharp rise in yields
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Since the money market rates are at least 1% to 2% lower, most of the bank credit book has shifted to the investment book, with banks investing in the corporate bonds of their clients.
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