With growth in non-food credit at its lowest in two years, the Reserve Bank of India (RBI) seems to be succeeding in its efforts to restrict lending. Year-on-year growth in non-food credit advanced by scheduled commercial banks was 27% on 27 April 2007, the latest date for which data is available. Last year, as on 28 April, year-on-year growth in non-food credit was 34.6%, while it was 28% on 29 April 2005.
In its monetary policy statement last April, RBI said non-food credit was “projected to increase by around 24.0-25.0% during 2007-08, implying a graduated deceleration from the average of 29.8% over 2004-07.”
The deceleration is unmistakable. Here are the numbers for year-on-year growth in non-food loans: 5 January 2007: 31.2%; 2 February: 30.2%; 2 March: 30.5%; 30 March: 29.5%; 13 April: 27.8%; 27 April: 27%. At this rate, it shouldn’t be long before RBI’s target is reached.
With the onset of the slack season, credit growth declines at this time of the year, but in 2007-08, the fall has been far sharper than in the previous year. This fiscal, to 27 April, non-food credit declined by Rs37,001 crore, compared with a fall of Rs17,867 crore in the same period last year.
How is loan growth slowing, while industrial growth continues to be very high? There could be many explanations—the high base effect, the industrial growth numbers for April may show a slowdown, or corporates are borrowing more abroad.
The State Bank of India’s March quarter results have easily beaten the street’s expectations but more important, from the market’s point of view, is the outlook for the bank. At an analyst meet on Saturday, SBI chairman O.P. Bhatt gave plenty of signals about the road ahead.
He stressed that the bank had stopped losing market share in advances. But he expects loan growth to moderate to 25% from the current 28%. That would impact the top line, since Bhatt said resistance to rate hikes is building up among borrowers and the bank won’t be able to pass on all of the increase in deposit rates. That will squeeze the net interest margin.
Lower credit growth and lower net interest margins should hurt profits, but the SBI chairman says he expects to improve profitability by increasing the proportion of low-cost deposits, through higher fee income and by the contribution from new businesses such as private-equity and venture funds, whichthe bank has planning to enter.
But in 2006-07, while fee income has increased, the proportion of current and savings bank accounts has remained more or less the same.
Bhatt also said that the bank will need Rs15,000 crore worth of capital in 2007-08, part of it equity, which will dilute earnings. The bank may also take a Rs5,000 crore or so hit if Accounting Standard 15 is implemented, which will increase the provisions for pensions and gratuity.
The SBI chairman said that the impact may be set off against capital, but that would lower capital adequacy, which will also be hit about 100 basis points by the Basel norms.
But the market will welcome the bank’s plan to create one or more non-banking financial companies, which will become the holding companies for SBI’s non-banking businesses, such as the insurance and mutual fund arms.
The NBFCs will then be listed, unlocking value. That prospect, together with the decision to enter lucrative new businesses and the positive surprise in the March quarter results should boost the stock.