Demand to drive credit growth rather than supply

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Credit growth in India has slowed down to 10% in FY14-21 from 18% in FY07-14. The current period saw declining GDP growth which is the most important force to push credit growth.

Demand-side issues

The credit growth was lower from the corporate side which is the main reason for overall lower credit growth. The corporate credit grew 2% in FY14-21 as compared to 20% growth in FY07-14. This was mainly because of the NPA formation in FY14-21 from infrastructure and commodity-related companies.

This period has been marked by a stagnant real estate sector and deflation in commodity prices, both, acting as a negative factor for credit growth and credit quality. However, retail loans grew 15% as compared to personal loans and home loans.

Supply-side issues

The growth was affected by massive NPA formation, ineffective underwriting, slow economic progress, bearishness in the commodity cycle and policy passivity. The PSU banks, except for SBI, were majorly hit by the NPA formation.

 Most of the banks went under the resolution process due to the poor quality of assets. Even though ICICI bank, SBI bank and Axis bank did not go through the resolution framework but were facing severe stress and management changes.

Alternative sources of funding

During the pandemic, large volumes of investments were from digital companies that earlier had negative cash flows due to quantum operating expenses. These companies raise funds from equity markets rather than debt markets. For the past few years, the liquidity has risen, and equity is available at cheaper rates because of which debt borrowing is decreasing. However, this could act as a turning point for credit growth.

The supply-side problems are resolving given that most of the PSUs are out of the PCA framework (banks with minimum capital and quantum of NPAs act in a restrictive way showing signs of stress). But the PSU banks other than SBI will still be less active. SBI Bank, ICICI Bank and Axis Bank have a lot of capacity to gain momentum due to good liquidity and strong balance sheets.

Hence the growth is reliant on demand rather than supply. The strong liquidity and the deleveraging phase of corporates will keep the corporate credit growth low for the next few months.

But over two years period:

  1. The government’s focus on infrastructure creation will support credit growth
  2. The rising demand for goods and services from the manufacturing sector will increase the working capital requirements.
  3. Many sectors in the commodity sector are turning out to be profitable and they might see capacity addition.
  4. Retail growth remains strong and India being a credit-starved country, the overall credit growth will revive with corporate growth rising pace.

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