Active Stocks
Fri Apr 19 2024 15:56:00
  1. Tata Steel share price
  2. 162.10 1.31%
  1. Tata Motors share price
  2. 963.20 -0.84%
  1. NTPC share price
  2. 350.90 -0.14%
  1. ITC share price
  2. 424.80 1.40%
  1. Power Grid Corporation Of India share price
  2. 281.70 0.54%
Business News/ Markets / Mark To Market/  Credit growth may moderate but banking on deposits to aid performance
BackBack

Credit growth may moderate but banking on deposits to aid performance

While credit demand from retail and NBFCs is likely to sustain, it is the industry credit demand that could be a cause for worry.

Latest data from the Reserve Bank of India (RBI) shows that the overall bank credit growth had been robust despite the increase in interest ratesPremium
Latest data from the Reserve Bank of India (RBI) shows that the overall bank credit growth had been robust despite the increase in interest rates

The Indian banking sector is on a strong footing in terms of credit growth, profitability, and asset quality. This is evident from its December quarter performance this year. Many analysts and industry experts expect the traction to continue, particularly on credit (loan) growth.

Latest data from the Reserve Bank of India (RBI) shows that the overall bank credit growth had been robust despite the increase in interest rates. The bank credit for the fortnight ending 10 February, grew by 16.1% year-on-year (y-o-y), predominantly led by retail credit demand including consumer durables. As per a report by CareEdge, other than the retail segment, the sustained growth in credit is also driven by strong growth in NBFCs and inflation-induced working capital requirement from sectors such as petroleum, coal products & nuclear fuels, and chemicals and chemical products.

Robust credit growth, along with interest rate hikes and faster repricing of loans, has aided the performance of both private and public sector banks which have reported healthy improvement in net interest margins (NIMs) in the past two-three quarters.

Going forward, to sustain credit growth, banks must increase the pace of deposit mobilisation to fund the credit demand. Banks have so far consumed their internal liquidity without increasing the deposit rates. But now, banks are starting to reprice the deposit rates to mobilise deposits. The re-pricing of deposits has gathered pace, and we are likely to see the margin cycle turn soon over the next one or two quarters, as per Kotak Institutional Equities.

As such, deposit growth stood at 10.2% y-o-y as per the latest RBI data, up from 9.2% y-o-y on 30 December. This was predominantly led by term deposits as banks have started to offer higher interest rates. As banks gather pace for deposit mobilisation, analysts expect the competition for deposits to intensify in the near-term. Within deposits, banks have seen a decline in current account and savings account (CASA) deposits, resulting in a moderation in the CASA ratio, as per analysts. The gap between deposit and credit growth is slowly narrowing to 6% in February from 8% in December.

At a time when deposits are gaining momentum, there are concerns that credit growth could moderate here on due to higher interest rates. Having said that, while credit demand from retail and NBFCs is likely to sustain, it is the industry credit demand that could be a cause for worry. With many economists expecting a slowdown in global growth, exports and manufacturing may also come under stress. This could dampen the credit offtake from this sector even more, says Aditi Gupta, economist, a Bank of Baroda in a report.

In terms of the performance of banks going forward, analysts from Motilal Oswal Financial Services remain watchful on the margins in FY24, and of the demand environment due to the challenging macroenvironment.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 28 Feb 2023, 11:13 AM IST
Next Story footLogo
Recommended For You
GENIE RECOMMENDS

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Switch to the Mint app for fast and personalized news - Get App