As economy turtles south, credit growth may plunge to 58-year low in FY20

Many international agencies have also revised downward their economic growth forecast for FY20.

As the GDP growth has plunged to an over six-year low of 4.5 per cent in the second quarter of the ongoing fiscal, credit expansion may plummet to a six-decade low of 6.5-7 per cent in FY20, says a report. Credit growth was a high 13.3 per cent in the previous fiscal, says rating agency Icra in a report. If the forecast turns out to be true, this will be lowest credit growth in as many as 58 years — credit growth stood at a low 5.4 per cent in FY 1962, according to the annual credit growth data on the RBI website.

It can be noted that GDP growth plunged to a 25-quarter low of 4.5 per cent in the second quarter and to 5 per cent in the first quarter and nobody is forecasting better numbers going ahead. Even the RBI has massively slashed its growth forecast to a low 5 per cent for the year — down by a massive 240 bps from its February projection of 7.4 per cent.

Many international agencies have also revised downward their economic growth forecast for FY20. Moody’s has lowered its GDP growth to 4.9 per cent from 5.8 per cent, while Japanese brokerage Nomura has pegged it at lowest 4.6 per cent for the fiscal.
Till end-November, according to RBI data, credit growth has been clipping at under 8 per cent.

The agency attributed the likely weak growth in advances will be on account of muted incremental credit growth so far in this fiscal. “Factors such as muted economic growth, lower working capital requirements as well as risk-aversion among lenders will compress the incremental credit growth in FY20,” report said, adding there was little demand for funds from three out of four key sectors — agriculture, industry, services and retail loans.

Till December 6, the incremental credit growth has risen by just Rs 80,000 crore to Rs 98.1 trillion compared to a rise of Rs 5.4 lakh crore and Rs 1.7 lakh crore during the same period in FY19 and Fy18, respectively, says the report.

The report says even if incremental credit increases to Rs 6.5-7 lakh crore in the second half of the year, the incremental net bank loan will decline by 40-45 per cent to Rs 6.3-6.8 trillion during this fiscal. According to the agency, year-on-year credit growth of 37 banks stood at 7.9 per cent as of September. Of this state-run banks’ credit grew at 4.4 per cent and that of private bank at 15 per cent.

“With strong capital position for most of private lender, their ability to pursue credit growth will continue to be driven by their abilities to mobilise deposits given their high credit/deposit ratio of 90 percent as of September,” the report says. It further says private banks may also face challenges in deposit mobilisation in the back drop of issues related to asset quality, profitability and capital issues being faced recently by some private sector banks, which may increase risk aversion among some depositors.

Incremental bank credit has increased by just Rs 80,000 crore during FY2020 till December 6, in contrast to the rise of Rs 5.4 lakh crore and Rs 1.7 lakh crore in FY2019 and FY2018 (till December), respectively.

Explaining the rationale behind low credit growth, the report says there has been a shift in capital requirement due to the economic slowdown and risk-taking capabilities of banks. In FY19, a major portion of bank credit had gone to NBFCs and HFCs, which in turn saw a credit squeeze in FY20, thanks to the ongoing crisis in the NBFC sector.

The recent data on bank credit from the Reserve Bank reveals contraction in incremental credit outstanding to the services as well as industrial segments, offset the entire growth in credit to retail segment during the first seven months, the report says. The report also warns of banks facing challenges in deposit mobilization, especially for private sector banks.

But on the positive side, incremental deposit accretion of the banking system at Rs 5.3 lakh crore remained higher than credit growth till December 6. Overall annualised deposit growth is expected to remain higher than credit growth at 8.4-9 percent for FY20, but it will be lower than 10 percent seen in FY19 and higher than 6.7 per cent of FY18.