Banks' credit growth to slump to 6.5-7% FY20 vs 13.3% FY19

Overall bank credit growth is expected to nearly halve to 6.5-7% in 2019-20 (Apr-Mar) from 13.3% in the previous financial year due to muted economic growth, lower working capital requirement of companies, and banks' increased aversion to risk, according to rating agency ICRA.

As of Dec 6, incremental bank credit in the current financial year was only 800 bln rupees, compared with 5.4 trln rupees in the corresponding period of the previous fiscal, the agency said.

Even in a high-growth scenario, where incremental credit rises to 6.57 trln rupees during Oct-Mar from 5.7 trln rupees in the previous year, the agency expects incremental bank credit to slump 40-45% to 6.3-6.8 trln rupees in 2019-20 from 11.9 trln rupees.

Banks' retail credit growth till October has been offset by contraction in credit to services and industrial segments, the agency said. Further, while credit to non-bank entities rose, trade credit and other services declined, resulting in an overall contraction in credit during this period.

Banks have fared better in terms of liabilities as deposit accretion at 5.3 trln rupees remained higher than credit growth till Dec 6. The accretion also remained higher compared with the corresponding period in the previous financial year.

"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 assets under management of debt mutual funds as well as higher liquidity maintained by various corporate entities," the agency said.

It expects banks' deposit to grow 8.49% in 2019-20 on an overall basis, lower than 10% in 2018-19.

Going ahead, credit growth of private banks will depend on their ability to mobilise deposits given their credit deposit ratio was at 90% as on Sep 30. Private lenders may also face challenges in mobilising deposits due to issues related to asset quality and profitability.

"As the banks have continued to cut the deposit rates since beginning of the FY 2020, we expect the cost of funds to decline further during next one year, which shall translate in lower lending rates to spur up the credit growth," the agency said.

On the capital front, ICRA expects YES Bank Ltd, South Indian Bank Ltd, Lakshmi Vilas Bank Ltd and Jammu and Kashmir Bank Ltd to have a collective requirement of 100150 bln rupees over the next couple of quarters owing to their lower capital ratios.

Aided by better recoveries and declining slippages, overall net non-performing assets (NPAs) of the banking sector are likely to improve to 3.2-3.3 per cent by the end this fiscal from 3.7 per cent in September 2019