Incremental bank credit shrinks by ₹1.76 tn between 27 March and 22 May
Deposits grew 1.9% between 27 March and 22 April, recording a y-o-y growth of 10.6% to ₹138.3 trillion
MUMBAI : The erosion in incremental bank credit since the start of the nationwide lockdown continues unabated, with the decline between 27 March and 22 May at ₹1.76 trillion.
According to data from the Reserve Bank of India (RBI), while non-food credit stood at ₹103.2 trillion as on 27 March, it shrank to ₹101.4 trillion as on 22 May. To be sure, credit growth is usually tepid in the first quarter of every financial year and incremental credit fell ₹1.68 trillion even between end of March and end of May last year. Still, it is notable that despite the government’s efforts to revive flow of credit into the economy through various steps announced following the covid-19 outbreak, credit has shrunk on a year-to-date (YTD) basis.
On a year-on-year (y-o-y) basis or between 24 May 2019 and 22 May 2020, credit grew by 6.15%, the RBI data showed. Rating agency Icra said in a note on 4 June that the incremental credit growth of banks during FY21 will be ₹6-7 trillion, as compared to ₹5.9 trillion during FY20, which will translate into a y-o-y credit growth of around 6-7%. This, Icra said, will be driven by 3.5-4.3% growth by public sector banks (PSBs) and 7-9% by private banks.
“With thin capital cushions and expected increase in stress on asset quality and profitability, we expect PSBs to require ₹45,000-82,500 crore of capital even under a scenario of low credit growth of 3-4% during FY21. Further, the investors’ appetite towards these banks will continue to remain weak amid prevailing uncertainties," said Anil Gupta, sector head (financial sector ratings), Icra.
Meanwhile, deposits grew 1.9% between 27 March and 22 April, recording a y-o-y growth of 10.6% to ₹138.3 trillion. Flush with liquidity and with little credit growth, banks have been cutting their deposit rates.
Analysts at brokerage firm Motilal Oswal said in a note on 22 May that continued monetary easing will drive further reduction in lending yields and banks have been sharply cutting retail and bulk deposit rates over the last few months. “Large banks have reduced term deposit rates by up to 150 bps to offset margin pressure. Overall, we believe that large banks with strong liability franchise would be able to tackle the margin pressure as compared to their mid-sized peers," the note said.
On 27 May, the State Bank of India (SBI) lowered its fixed deposit rates by up to 40 bps. It was the bank’s second deposit rate cut in May, with the previous one on 12 May. Retail depositors now earn an interest of 5.1% on their 1-2-year term deposits of below ₹2 crore, down from 5.5% earlier.
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