The banking sector looks to be on track and is expected to comfortably achieve 20%-plus credit growth in FY11 (fiscal year 2011).
Banks have reported 23.3% year-on-year (y-o-y) growth in bank credit to Rs38.1 trillion for the fortnight ended 25 February. At the same time, deposit growth continued to lag at 16.5% y-o-y and stood at Rs48.4 trillion (1.4% fortnightly growth). Net credit offtake for the latest fortnight has been Rs25,900 crore (1.3% fortnightly growth).
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Banks have reported a year-to-date, or YTD, (April 2010 to February 2011) credit growth of 17.6% vis-a-vis deposit growth of 12.2%. Historically, we have seen around 4% sequential growth in March in credit offtake as well as deposit mobilization.
Considering this, we expect system-wide credit growth by the end of this fiscal at around 22% and deposit growth at around 16%.
Gyrating to liquidity tightness and directive by the Reserve Bank of India to ramp up deposit mobilization, since the start of December banks have aggressively hiked deposit rates. As a result, post-December deposit growth has outpaced (around 6%) credit growth (4.7%).
Incremental loan-to-deposit ratio YTD, though has eased to 100% from as high as 113%, is still not very encouraging. While advance tax outflows and higher credit offtake in March will keep liquidity and wholesale rates under pressure, we expect slackness in credit offtake in the first quarter of FY12 and relatively better deposit growth (due to higher rates) to improve the liquidity situation. We, therefore, expect wholesale rates to come off post March. Also, retail deposit rates are nearing peak at present.
The sectoral deployment data, released up to 28 January, highlights the continued buoyancy in the industry segment.
A key positive has been the broad-basing of industry credit with contribution flowing from basic metals, engineering and food processing, supporting the key growth vector—infrastructure.
Performance on retail credit (up 16% y-o-y vis-a-vis 2% a year back) is improving on the back of increased traction in vehicle loans and housing. The services segment has registered 23% y-o-y growth, largely propelled by 41% growth in funding to non-banking finance companies, whereas commercial real estate funding is flat sequentially (a reflection of tightness in funding to sector, post the break-out of loan for cash scam).
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Edited excerpts from a report by Edelweiss Securities. Your comments are welcome at firstname.lastname@example.org