Bank credit growth shows first signs of a slowdown

An expected slowdown in credit off-take from banks may well have started, what with interest rates ruling high.

In a first sign, total bank credit for the fortnight ended April 22 has fallen 0.95% to Rs3,919,000.47 crore compared with the previous fortnight, according to data released by the Reserve Bank of India (RBI) on Thursday.

For the fortnight ended April 8, total bank credit had posted a marginal (0.45%) increase as against the fortnight before.
On a year-on-year basis, though, bank credit was up 21.89% for the fortnight ended April 22.

Typically, credit growth for banks slows down in the opening quarter of a fiscal.

But this time, analysts see credit growth staying depressed for longer as the money available with people shrinks due to high interest rates prevailing in the economy. Retail credit growth, in segments like housing, vehicles and consumer durables, would be particularly affected.

So much so, some analysts see risks to RBI’s target of a 19% growth in bank credit this fiscal.

“There are downside risks to the 19% credit growth because RBI has communicated its stance that it may aggressively increase interest rates to control inflation. RBI is in fact ready to sacrifice short-term growth,” said Nitin Kumar, deputy vice-president, Quant Broking.

The RBI’s rate hikes will make loans costlier. Several banks have already raised their lending rates after the RBI’s 50 basis points hike in key policy rates on Tuesday and others are likely to follow.

“The impact of rate hike will be transmitted largely by an increase in the base rate (the minimum rate at which a bank lends),” State Bank of India chairman Pratip Chaudhuri said earlier this week. Base rate review meeting of SBI is scheduled later this month. Last month, SBI raised its base rate by 25 basis points to 8.50%.
The signs of slowdown come after a robust growth in bank credit last fiscal.

According to RBI data for March, the off-take of consumer durables loans and vehicle loans, which had driven retail credit last fiscal, has slowed down a tad.

Worse, analysts see these segments continuing to underperform for much of this fiscal.

“From the bank’s side, they will not shy away from lending in the retail segment. But customers may not come due to high interest rates,” said Kumar.

Ranjan Dhawan, chief general manager (retail credit), Punjab National Bank, agreed that it would be difficult to achieve the retail credit growth seen last fiscal.

Vehicle sales have already come down and in the housing loans segment, it is only the first-time home buyer who is buying one, he pointed out.

A senior official of another large bank couldn’t agree more.