Headline

Credit growth to remain range bound in 2012-13

Published On

Oct 19, 2012

Abstract
CRISIL Research forecasts banking credit to grow by 15-16 per cent in 2012-13. Lower capital investments across industries and cautious lending on account of stress witnessed in portfolios will restrain growth. Second half of the 2012-13 is expected to be better than the first as interest rates start declining.

Key Issues
- What would be the growth in advances? -

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Liquidity pressure moderates

Monetary and liquidity conditions remained tight during 2011-12 due to factors such as credit growth outpacing deposits growth, lower drawdown of government balances and dollar sales by the RBI to stem the rupee's decline. Subsequently, to handle the cash crunch in the market, the RBI injected liquidity through open market operations (OMOs), reduced the cash reserve ratio (CRR) by 125 bps during January to March 2012 and conducted repo auctions under the liquidity adjustment facility (LAF). Liquidity conditions eased further in April 2012 following increase in government spending. In the current fiscal, the central bank lowered the statutory liquidity ratio (SLR) by 1 per cent to 23 per cent in August 2012 to ensure flow of credit to the productive sectors of the economy. In the September 2012 monetary policy announcement, RBI lowered the CRR by 25 bps to 4.5 per cent of net demand and time liabilities (NDTL) citing liquidity pressures that may arise from advance tax outflow and festival-related currency demand. The 1 per cent reduction in SLR is, however, expected to have limited impact on the banking system. This is because the current SLR in the banking system is already at ~28-29 per cent (the proportion of deposits to be parked in government securities is well above the mandated 23 per cent) and there are no banks that currently have borrowings under the MSF (marginal standing facility), which indicates sufficient liquidity in the banking system. However, the CRR cut will increase liquidity in the banking system by Rs 170 billion and consequently lower the cost of funds for banks. We expect this to translate into lower lending rates on select portfolios, especially in the retail segment. The SLR and CRR reduction along with lower credit offtake will cause liquidity to remain well within the RBI's comfort zone of 1 per cent of NDTL.

Credit growth showing signs of moderation

During the first five months of 2012-13, credit outstanding grew by a mere Rs 170 billion vis-a-vis and of March 2012 outstanding. Disaggregate data indicates that credit growth moderation is led by a sharp decline in credit to industries such as textiles, petrochemicals, iron and steel, cement and telecommunications. The prevailing high interest rates also affected credit growth to sectors such as housing, automobiles and commercial vehicles. New loan sanctions have also decreased significantly over the past 2-3 quarters with companies postponing their capital expansion plans in the wake of an overall slowdown in the economy and declining return on investments. Growth in the infrastructure sector, which was a credit booster till FY11, moderated to 15.5 per cent (y-o-y) in July 2012. Among infrastructure sectors, growth in credit outstanding to the power sector slowed down to 18.7 per cent, as the sector continued to be plagued by issues over the rising cost of fuel and its availability. Increased government borrowings and slow offtake in capital investments due to weak investment sentiments and policy logjams had restricted credit growth to 16 per cent till July 2012.

Credit growth to remain range-bound in 2012-13

Aggregate bank credit will be limited to 15-16 per cent in 2012-13 (as compared with over 17 per cent in 2011-12 due to factors such as moderation in economic activity, the cautious approach taken by the industry towards capacity additions and stress across sectors. An expected decline in capital investments across industries including cement, petroleum, metals, roads and ports, airports, vehicle and vehicle parts will limit a strong recovery in credit growth in 2012-13. Growth in credit to the infrastructure sector will remain slow and will be led by cautious lending to the telecom and power sectors. Power sector growth will continue to be affected by delays in the execution of projects, issues relating to availability and pricing of coal and hurdles in obtaining environmental clearances for coal mining in addition to concerns over the asset quality of discoms. Also limiting the bank credit growth in 2012-13 will be the lower-than-expected growth in the services sector affected by weakening global demand, and slowing construction growth. Over the same period, however, the personal loan segment is likely to grow by about 15 per cent, driven by an expected recovery in home loan offtake triggered by the declining interest rates.

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No part of this Report may be published/reproduced/distributed in any form without CRISILs prior written approval.

However, disbursements from previously sanctioned term loans and working capital loans and refinancing of foreign currency denominated loans, which were made unviable by the volatility in exchange rates, will support domestic credit growth. Moreover, increasing risk aversion of international financiers in lending to emerging economies has led to drying up of foreign funds, which indicates opportunities for domestic credit growth.

Credit growth to revive marginally in 2012-13

P:Projected Source: RBI, CRISIL Research

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