Indian Banks are likely to face slowdown in credit growth

March 30, 2023

Indian banks are likely to witness some slowdown in credit growth due to rising interest rates and likely slowdown in overall economic growth, say analysts.

“Our house view calls for a YoY (year-on-year) decline in GDP (gross domestic product) to 5.9 percent for FY24, which is also reflected in our banking credit growth assumption for FY24, which is at 13.5 percent, down from 15 percent YoY in FY23. There is likely to be moderation in FY24,” said Karan Gupta, Director, India Ratings & Research (Ind-Ra).

However, a report by Emkay Global Financial Services Ltd said that credit growth in the Indian banking system remained robust at 15.7 percent YoY for the fortnight ended March 10, 2023, compared to 15.5 percent for the prior fortnight.

“With rising rates, net interest margins of banks may see some moderation and some interest rate-sensitive sectors may see an impact if there is a major global liquidity accident or interest rate blow-out in the United States,” said Dr. Sachchidanand Shukla, Chief Economist at Mahindra & Mahindra.

Economists believe that the rate hikes by the Reserve Bank of India (RBI) have elevated the credit demand and widened the credit-deposit gap, and there is intense competition among banks for sourcing deposits, the ‘raw material’ for growth.

“Indian banks will need to contend with uncertainty over the interest rate cycle as well as the longevity of credit growth cycle. Hence, they may prefer to raise interest rates tactically through limited-period offers till there is clarity on the growth and interest-rate cycle,” said Shukla.