Surging investment spending and rising inflation are fueling growth in credit drawdowns over two years

After nearly two and a half years, credit growth in the banking sector has reached double digits, with drawdowns by borrowers increasing by 11.2% year on year (year-on-year) as of April 8, 2022, on the back a large investment plan (capex) for the State and companies, and demand for working capital.

Among other factors, a senior banking official said, “Rising inflation has led to increased working capital requirements in various sectors, resulting in increased credit growth.” With the Covid pandemic hitting the economy, credit growth fell to 5.3% in the same period last year, according to the latest Reserve Bank data.

In absolute figures, credit drawdown more than doubled by Rs 12.03 lakh crore in the 12 months ended April 8, from Rs 5.50 lakh crore a year ago. Total outstanding credit stood at Rs 119.88 lakh crore as of April 8, according to RBI data.

Bank credit growth was 14.5% year-on-year during the fortnight ending March 15, 2019. Credit growth has since declined and fell below the 10% level in October 2019.

The fortnight ended April 8 witnessed a credit drawdown of Rs 96,708 crore. Normally the last fortnight of the financial year shows a substantial increase in growth, with banks releasing credit in the final weeks of the financial year, a senior banker said.

In addition, the RBI’s decision to keep the main policy rate – Repo – at 4% is expected to boost lending activity. “Investment activity may gain traction with improving business confidence, recovery in bank lending, continued support for government capital spending and favorable financial conditions,” the governor said. RBI, Shaktikanta Das, during the monetary policy unveiling last week.

The State Bank of India (SBI), India’s largest commercial bank, last week raised the marginal cost of funds-based lending rates (MCLR) for the first time in three years, signaling that the regime flexible rates that have prevailed since 2019 could be ended.

Banks expect the repo rate – the main benchmark rate – to rise from June as the RBI seeks to suck liquidity from the system to contain inflation. Indicating upward pressure on interest rates, the yield on benchmark 10-year government bonds hit 7.15%, rising 24 basis points in less than two weeks. On the other hand, the cost of funds is expected to rise, prompting banks to raise lending rates.

On April 8, the RBI’s Monetary Policy Committee restored the Policy Rate Corridor under the Liquidity Adjustment Facility to the pre-pandemic width of 50 basis points by introducing the Standing Deposit Facility ( SDF) at 3.75 as the floor of this corridor. The SDF is an additional tool used by the RBI to absorb excess liquidity. Essentially, overnight rates were raised to 3.75%.

In response to the 250 basis point reduction in the repo rate since February 2019 – when the current easing phase began – WALRs on fresh and outstanding loans in rupees have decreased by 213 basis points and 143 basis points respectively. This cycle is being reversed.

The sectoral rollout of raw bank credit data for the month of February shows that while overall industry credit demand increased by 6.5%, infrastructure segment credit demand increased by 11.5% in February. Agribusiness and oil experienced double-digit growth. Medicines and pharmaceuticals and textiles recorded credit growth of 9.9% and 7% respectively.

Personal loans showed a growth of 12.3% to reach Rs 33.06 lakh crore in February 2022.

On the other hand, outstanding deposits rose by 10.06% to Rs 167.42 lakh crore as on April 8. Deposits have increased by Rs 15.30 lakh crore over the past 12 months.

According to RBI data, credit disbursement during the two fortnights ended 5 November 2021 (covering Diwali, Dussehra and Navratri) stood at Rs 150,278 crore, significantly higher than in 2020, when it s amounted to Rs 81,361 crore over the two fortnights spanning the three festive periods.

The credit disbursement this year was even higher than that of the two fortnights of 2018 and 2019, when it stood at Rs 118,050 crore and Rs 70,799 crore respectively.

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