Understanding India’s Credit Growth Dynamics

02 May 2022

Citi analysts analyze the contours of credit growth in India admist a materially improving covid situation in the country and high frequency activity indicators pointing towards cautious optimism. However, they observe a lack of credit growth which has trailed the nominal GDP growth in FY22. With expected recovery in private capex cycle, the credit demand is expected to revive albeit with headwinds emerging as the RBI is preparing the markets for a rise in interest rates. Key Points appended Below:

• 1. Credit Environment: Citi analysts highlight the following in reference to the prevailing credit environment: #1 Improvement in Bank credit growth (up to 8.6%) with adjusted credit growth series (non-bank sources) improving to 8.8%YY by Mar-22. #2 Increase in the share of industrial loans in incremental credit (3% share in total bank credit during peak pandemic period to 22% share now). #3 Higher Growth in credit to medium-sized firms (71%YY) vs large-sized firms (0.5%). #4 Significant improvement in the NPA ratio of banks (6.5% by December 2021 and 8.5% FY20). #5 50%+ active customers are now Sub-prime raising some retail asset quality concerns (Sep -21)



• 2. Bank Credit Off take - Low: — #1 End of capex boom has worsened the bank balance sheet given the preference to fund lower-sized projects.Low corporate profitability may have hindered bank credit growth in pre-pandemic period. #2 Lower credit demand likely due to the relative preference for raising equity in the post pandemic period along with availability of cheaper market borrowing options. #3 Growth of non-bank sources of credit contributing to decline in bank credit growth #4 Only AA+ borrowers saw positive credit growth in Sep-21 indicating risk aversion thereby impeding credit growth.
• 3. Hike in Lending Rates: Nominal interest rates have reached all-time lows in India as the economy dealt with the economic impact of pandemic. In the current easing cycle - starting Feb 2019, the lending (213bps) and deposit (208bps) rates on fresh loans/deposits have responded more or less in line with the 250bps cut in the repo rate. In FY22 the decline in lending rate for fresh loans has been only 10bps. Spread over the repo rate for different kinds of retail and MSME loans have modestly declined in 2HFY22.Citi analysts expect the WALR on outstanding loans to increase by 100–120bps over the next 12 months.



• 4. FY23 Credit Outlook: A historical analysis of the relationship between G-sec yields and lending rates suggests a 6-month lag. Citi analysts expect external benchmarked and MCLR linked loans to be repriced ( ~100-120bps increase in lending rates on outstanding loans is possible next 12 months) given their expectation of 150bps hike in repo rate. They expect a 10-12% credit growth in FY23.

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