The positive credit growth outlook is driven by economic expansion, increased capital expenditure, implementation of PLI scheme and a push for retail credit
| Photo Credit:
Denis Vostrikov

Scheduled commercial banks’ (SCBs) credit growth is expected to be in the range of 13.0-13.5 per cent for FY24, excluding the impact of the merger of HDFC with HDFC Bank, according to CARE Ratings.

Credit offtake experienced robust growth of 16.2 per cent in Q1FY24 and the outlook remains positive for FY24, per the rating agency’s analysis of 30 banks, including 12 public sector banks and 18 private sector banks.

The positive credit growth outlook is driven by economic expansion, increased capital expenditure, the implementation of the PLI (production linked incentive) scheme, and a push for retail credit, the agency said.

CARE Ratings said it is important to consider that this growth would be coming off a high base in FY23, which might have a marginal impact on the growth rate.

As the CD (credit-deposit) ratio remains elevated, growth in the liability franchise would play a significant role in sustaining loan growth, said Sanjay Agarwal, Senior Director; Saurabh Bhalerao, Associate Director – BFSI Research; and Vijay Singh Gour Lead Analyst – BFSI Research, CARE Ratings.

The CD ratio stood at 75.1 per cent as of July 01, 2023, expanding by ~210 basis points (bps) year-on-year over a year ago due to faster y-o-y growth in credit compared to deposits.

NIM could be under pressure

Funding costs

The agency’s research team observed that competition for deposits is likely to intensify even further, resulting in a rise in funding costs in the coming quarters as rates rise and CASA (current account, savings account) share reduces.

They opined that the margin trajectory could witness pressure in the later part of FY24 as competition would also cap the interest rates charged at a certain level

Net Interest Margin (NIM) of SCBs witnessed a year-on-year improvement of 36 basis points (bps), reaching 3.27 per cent in Q1FY24.

“This enhancement can be attributed to the faster repricing of loans, whereas deposit rates have not yet reflected the increased interest rates.

“Besides, SCBs witnessed higher-than-expected deposit growth in the quarter. The anticipated rise in deposit costs, which is expected to be a lag effect, is likely to put continued pressure on NIM in Q2FY24,” the agency said.