RBI rate hikes will weigh on banking system credit growth: India Ratings
The surprise rate hike by the RBI signaling a reversal in the interest rate cycle will weigh on credit growth in the banking system, which was showing signs of recovery with growth of 11%, according to a report on Thursday.
The tailwinds supporting a recovery in credit growth will be in demand in the industrials and services segments, even if growth in the agriculture segment remains stable and muted in the retail segment, said India Ratings and Research.
In the medium term, inflationary pressures, supply chain disruptions and weak consumer demand could disrupt the current pickup in credit growth, he added.
“…the inversion of the interest rate cycle, as indicated by the 0.40% increase in the repo rate by the Reserve Bank of India, would weigh on credit growth as borrowing becomes more expensive,” he said.
The agency added that it had received feedback from companies rated by it, indicating a delay in capital spending plans as they await more clarity on the macroeconomic front.
He said banking system credit growth showed a significant recovery at the start of FY23, with credit growth of 11.2% as of April 8, 2022, compared to 5.3% during the same period. in 2021, he said. , adding that it is the highest since July 2019.
The agency believes that while the second wave of Covid had a significant impact on the credit outlook in 2021, the outlook reasonably normalized in early 2022.
In a report released in February, the agency had estimated that system-wide credit growth would be 10% for FY23. The number was not revised in the latest update.
On Monday, he said sectors expected to continue to perform well will include energy, metals, cement, chemicals and textiles, while telecommunications, pharmaceuticals and commercial real estate will come under pressure.
In the near term, continued corporate demand for working capital, driven by high commodity prices and the beginning of a return to the banking system of bond markets amid rising interest rates that would keep the engines of credit growth in place, the agency noted. .
Retail lending continues to be the main contributor to additional year-on-year growth, although the proportion fell to 42.7% in February 2022 from 57.7% in March 2021, it said. -he adds.
The agency said half of the additional retail lending since July 2021 has gone to the unsecured segment, meaning lenders are looking for wider profit margins. However, he was quick to add that they are doing so with stricter credit screens after their pandemic experience.