Indian banks' loan growth to accelerate despite higher interest rates

Loan growth at Indian banks will accelerate to 13% in this fiscal year despite the RBI raising interest rates, as economic activity picks up after a pandemic led lull, Fitch Ratings said on Monday. Lending growth for the previous fiscal year stood at 11.5%.

The Reserve Bank of India has raised interest rates by a total 190 basis points since May to fight inflation, which has only recently shown some signs of easing.

India's annual retail inflation eased to a three-month low of 6.77% in October, helped by a slower rise in food prices and a higher base effect. While full-year growth will show a modest slowdown from the 17% pace seen in the first half, credit demand is expected to stay robust into the next financial year if economic expansion continued, Fitch added.

Demand for credit has rebounded after a pandemic lull, with consumers and businesses stepping up spending as the economy roared back to life The country's economy likely returned to a more normal 6.2% annual growth rate in July-September after a double-digit expansion in the previous quarter, a

Reuters poll showed.

Strong loan growth will, however, put pressure on core equity tier 1 ratios if credit growth exceed expectations, limiting buffers to absorb potential future losses, the ratings agency said.

Deposit growth is seen at 11% this year and the next, slower than loan growth. Increased deposit rates may put some pressure on margins, but lower credit costs should offset pressure on profitability, Fitch said, adding that near-term asset quality risks appeared contained.

"Deposits' large role in banks' funding mix are likely to remain a credit strength for Indian banks, despite some normalisation in household savings after being boosted during the pandemic," the note said.

Meanwhile, Indian banks are set to step up fund raising through bonds in next few weeks to take advantage of a recent fall in yields and meet capital requirements amid a pick-up in credit growth, analysts said.

State-run banks such as Bank of India and Bank of Baroda are in talks with merchant bankers to raise funds via Basel III-compliant additional tier-I perpetual bonds, according to arrangers.

Bank of India is planning to raise up to 15 billion rupees ($183.67 million) through tier-I bonds and may tap the market by the end of November, a senior official from the bank said on Wednesday. "Many investors have shown their interest and accordingly approached us for participation in our additional tier-I bond issue," said the official, who refused to be named because the matter is not public yet.

Union Bank of India has announced plans to raise up to 22 billion rupees via tier-II bonds, while Jammu and Kashmir Bank is also at an early stage to raise 15 billion rupees via tier-II bond offering, three merchant bankers with the knowledge of the matter said. "In order to meet the rising credit demand, banks are raising additional capital in the form bonds so as to increase their balance sheet size," said Sameer Kaul, managing director and chief executive officer of TrustPlutus Wealth India.

Separately, private lender Kotak Mahindra Bank has announced plans to raise 15 billion rupees through 7-year infrastructure bonds, merchant bankers said. State Bank of India, the country's largest lender, is also considering raising up to 100 billion rupees via infrastructure bonds, it informed the exchanges on Thursday.