Credit growth of banks drops to 5.7%
Credit growth of banks has dropped to a multi-year low of 5.7% as demand for large loans remained weak and private banks gained on the back of a healthy retail market share.business Updated: Jul 16, 2016 18:33 IST
Credit growth of banks has dropped to a multi-year low of 5.7% as demand for large loans remained weak and private banks gained on the back of a healthy retail market share.
The credit growth of public sector banks dropped to 4% during the year, while private banks reported 18.7% rise during FY2016. “Credit growth was also low on account of conversion of state discoms’ (distribution companies) loans into bonds (loans converted into UDAY bonds issued by the government),” according to a report by ICRA Ratings.
While the demand for credit from large companies remained subdued, retail and agriculture sectors were growth drivers -- posting growth of 19.4% and 15.3% respectively, the report added.
The overall systemic credit growth was higher at 9.4% and this includes lending from corporate bonds and commercial paper that offer lesser interest rates than banks. Banks are gradually lowering interest rates to become competitive.
On the deposit front, despite moderation in inflation and an improvement in real interest rates, all banks’ aggregated deposits grew by merely 6.4% in FY2016 vs deposits growth of 10.3% a year ago. This growth was marginally higher than credit growth.
The sluggishness in deposits growth could be on account of psychological impact on depositors following a decline in nominal interest rates on deposits (even as real interest rates improved), significant raising of tax-free bonds over the last few years providing alternative safe savings avenue, increase in limit for remittances and banks reducing dependence on large ticket deposits on the back of muted credit growth, said ICRA.
The ratings firm also pointed out that while banks’ bad loans may not worsen materially from current levels, their credit costs – cost of lending – could remain at elevated levels over next 1-2 years as banks’ build provisioning cover against the elevated gross non-performing asset levels as well as other weak assets.
Banks have to set aside enough capital as provisions to cushion against weak and potentially weak accounts.
Banks’ provision cover was around 41.7% as on March 31, 2016 as against 44.4% as on March 31, 2015. Though 14 out of 26 public sector banks reported losses in FY2016, their profitability profile is not expected to be as weak in FY2017 as it was in FY2016.