Indian banks experience steady credit growth despite aggressive hikes in repo rate: Report

Despite the Reserve Bank of India (RBI) raising the repo rate by 250 basis points in FY2023, the lending strength of Indian banks remains steady, according to a Bank of Baroda report. This resilience stands out as the central bank kept its policy rate consistent in its first bi-monthly policy of FY2024, with interest rates hovering above the average. Nevertheless, this has not impacted borrowing, which continues its ascent, propelled by robust demand. Bank lending growth rose to 15.9 per cent in April 2023 from 15 per cent in March 2023, the report detailed.

Segment Wise Analysis

Agriculture and Allied Activities

Lending to agriculture increased to 16.7 per cent in April 2023, up from 15.4 per cent in March 2023, preceding the vital cropping season. Bank credit towards agriculture expanded 2.27 per cent month-on-month from March 2023 to April 2023.

Industry

While somewhat low-key, industrial credit growth received a lift, increasing by 7 per cent compared to 5.7 per cent in March 2023. This boost resulted primarily from large firms, showing growth of 5.3 per cent against 3 per cent in March 2023. Medium-sized industries displayed consistent growth at 19.1 per cent, but lending growth to micro and small industries decreased to 9.7 per cent in April 2023, down from 12.4 per cent in March 2023.

Services

The services sector saw credit growth rising to 21.6 per cent compared with 19.8 per cent in March 2023. The aviation sector witnessed a notable rise in credit growth to 30 per cent in April 2023 from 18.1 per cent in March 2023 with air travel returning to an upswing.

Retail Loans

Although growth in retail loans fell to 19.4 per cent in April 2023 from 20.6 per cent in March 2023, this sector's demand outstrips overall credit demand. It represents over 30 per cent of total credit, thereby fuelling total credit growth.

Lending Trends in Specific Industries

The mining and quarrying sectors observed a significant rise in credit growth to 27.5 per cent compared to 23.6 per cent in March 2023. Infrastructure-related sectors like roads, railways, and telecom gained from capital expenditure growth. However, airports encountered a decline in credit growth in April 2023.

Construction and linked sectors like glass and metals experienced lending growth, buoyed by higher demand in the property market. Despite export challenges, credit growth to engineering products increased to 7 per cent in April 2023, up from 6 per cent in March 2023. Industries such as beverages, tobacco, textiles, leather, and wood also saw improvements in credit growth.

Forecast

The economy's total credit demand is expected to hold at 12-14 per cent in FY 2024, following a 15 per cent rise in FY 2023. This moderation may relate to a high comparison base and a GDP growth slowdown from 7.2 per cent in FY 2023 to 6-6.5 per cent in FY 2024. Retail loans, led by housing and vehicle loans, are predicted to continue their upward trajectory. Services sector credit growth, with contributions from NBFCs, tourism, aviation, and retail trade, should remain steady.

In the agricultural sector, credit growth will largely hinge on the El Nino weather system's effects. In the industrial realm, infrastructure and construction are expected to outshine other sectors.