The Indian banking sector is experiencing a notable slowdown in credit growth, influenced by regulatory measures and shifting economic dynamics.
The Indian banking sector is currently witnessing a deceleration in credit growth, a trend that has garnered significant attention from economists and policymakers alike. As of October 18, 2024, non-food credit (NFC) growth, excluding the impact of the HDFC Bank merger with HDFC, has slowed to 12.8% year-on-year (YoY), down from 15.5% YoY observed on October 20, 2023.
This decline is not an isolated occurrence but part of a broader pattern. In the pre-COVID period, specifically September 2019, NFC growth had already dipped to 8% YoY, indicating an economic slowdown even before the pandemic’s onset. Post-COVID, there was a brief resurgence with NFC growth reaching 16.9%-15.4% YoY between September 2022 and March 2023. However, this momentum was short-lived, with growth tapering to 14.4% in September 2024 and further declining to the current 12.8%.
Several factors contribute to this slowdown. The Reserve Bank of India (RBI) has implemented measures to temper the rapid expansion of unsecured loans, which have been growing at an unsustainable pace. In August 2024, RBI Governor Shaktikanta Das cautioned banks about the high growth in retail loans and weak deposit growth, urging them to monitor loan quality to avoid systemic risks.
Additionally, the RBI has increased risk weights on unsecured loans and loans to non-banking financial companies (NBFCs), aiming to mitigate potential financial instability. This regulatory tightening has led banks to adopt more cautious lending practices, particularly in the retail segment.
The deceleration in credit growth is also evident across various sectors. Credit growth to the services sector stood at 14.1% YoY in October 2024, a decline from 20.4% observed a year earlier. Similarly, credit growth to industry was at 8% in October 2024, compared with 4.8% a year ago, indicating a modest improvement but still reflecting cautious lending.
Deposit growth has shown a slight uptick, outpacing credit growth in recent months. As of November 15, 2024, deposit growth reached 11.21% YoY, slightly surpassing credit growth at 11.15% YoY. This shift suggests that banks are focusing on strengthening their deposit base to support sustainable lending practices.
The implications of this slowdown are multifaceted. On one hand, it reflects a prudent approach by banks to maintain financial stability and asset quality. On the other, it could signal a dampening effect on economic growth, as reduced credit availability may hinder investment and consumption.
Analysts project that this trend may continue into the next fiscal year. Credit rating agency ICRA estimates that incremental bank credit growth will slow to approximately 12% YoY in the 2024-25 fiscal year, translating to an increase of ₹19-20.5 lakh crore.
In conclusion, the Indian banking sector is navigating a period of moderated credit growth, influenced by regulatory interventions and a cautious lending environment. While these measures aim to ensure financial stability, it is essential to monitor their impact on the broader economy to strike a balance between prudence and growth.#Hydkhabar
About The Author
