Rates, base-effect set to pull back galloping credit growth

Expecting banks to do well because credit growth is rebounded and has been galloping ahead in the last couple of fortnights?

The refrain on the Street is it may have peaked out, actually, due to high lending rates and base effect, after ranging between 22% and 24% in the last three months, well ahead of the Reserve Bank of India’s target of 20% for the current fiscal.

“Credit growth has peaked out and shall now start coming down. It is expected that by July 2011, it will come down to around 16-17%. Last year, at that time, credit growth was strong due to lendings to the telecom sector,” said Suresh Ganapathy, head of financial research team at Macquarie Securities, alluding to the heavy borrowings of telecom players for the 3G and broadband wireless access spectrum auctions.

Growth in loans next fiscal is expected to be 18-20% and downside risks to that can’t be ruled out, said analysts.

“Banks have been raising their lending rates and passing on the rising funding costs. We expect loan growth to moderate to 18% for financial years 2011-13 (from current 24% growth) on the back of 8% GDP growth and 6% inflation levels,” said Manish Karwa, M B Mahesh and Nischint Chawathe of Kotak Institutional Equities in a note on Wednesday.

Will there be further lending rate hikes?

“I think at the most there is some scope for 25 to 50 basis points hike in lending rates. But even that will affect credit growth to some extent,” said Vaibhav Agrawal, vice president (research), Angel Broking.
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Rates, base-effect set to pull back galloping credit growth

The consensus building is that the Reserve Bank of India (RBI) will resort to a further hike of 25 basis points in the key policy rates in the next monetary policy review due in mid-March.

Banks are expected to follow suit by raising their base rates, making loans dearer.

Borrowers are already complaining.

“Due to high lending rates, the viability of infrastructure projects is impacted,” said Hemant Kanoria, chairman and managing director, Srei Infrastructure Finance.

Some say at the ground level, credit growth hasn’t been really trending up.
“If you take out the 3G spectrum auction loans and the lumpy infrastructure loans, I don’t think credit growth has been very high,” said Rajrishi Singhal, head policy and research, Dhanlaxmi Bank. He doesn’t see a sharp decline in loans, “but it won’t be like this fiscal”.