India’s Strong Credit Growth Might Indicate That A Recovery Is Underway

A report by the credit rating agency CRISIL estimates that India's credit growth rate could touch 15 per cent per annum in 2023 and 2024.

Over the last few years, Indian banks, especially government-run banks had been struggling with loans turning into non-performing assets.

At the same time, companies had been deleveraging their balance sheets — as a result, both demand and supply of credit were limited.

However, the tide appears to be turning as the economy recovers from the Covid-19 pandemic and demand for goods and services returns.

What Is Driving Credit Growth?

CRISIL isn’t the only one optimistic about India’s credit growth. Just a while back, SBI managing director Swaminathan Jankiraman had said that he expected corporate credit growth of 12 per cent on average over the next two years.

Since credit growth is a leading indicator of the economy’s state, sustainable credit growth could indicate better days ahead.

Corporate credit, which grew at a compounded annual growth rate (CAGR) of a mere three per cent between 2019 and 2022, is expected to grow at a CAGR of 10 to 12 per cent by CRISIL.

In September, non-food credit grew upwards of 15 per cent.

Public sector banks (PSBs), which had been struggling with non-performing assets, lack of funds, restrictions under the prompt corrective action (PCA) framework and other issues, have managed to solve some of these issues.

Earlier, only 20 to 25 per cent of PSBs even met the Tier-I capital adequacy requirement, but now all PSBs meet the required criteria.

Today, these companies have managed to get off a significant portion of bad loans from their balance sheets and received capital infusion, allowing them to begin lending.

According to the Reserve Bank of India, the non-performing assets in the bank’s books stood at 5.9 per cent in financial year 2022 (FY22), which was the lowest since 2014.

By 2024, the figure is expected to drop to 4 per cent, giving banks more breathing space.

So far, the central bank was focused on putting an end to the NPA crisis, but as banks clean up their books, the focus can shift back to healthy credit growth.

Retail loan earlier accounted for a quarter of total credit, but now accounts for nearly a third of total credit — indicating a strong demand for retail credit.

Is Capex About To Make A Comeback?

According to CRISIL, there are several other tailwinds on the demand side that favoured credit growth — the government’s focus on infrastructure growth, higher working capital requirement, and utilisation of bank credit instead of debt issuances in the capital markets.

The government is expected to spend upwards of $90 billion on infrastructure, in public sector capex.

Private sector capex is likely to be enhanced by the government’s production-linked incentive scheme, which is aimed at boosting investments in new projects as well.

A research report by HDFC shows that Reliance is the leader on the capex side with a planned expenditure of Rs 2.43 lakh crore between FY22 and FY24.

The common areas of investment are refineries, gas exploration projects, and the expansion of the retail store footprint.

The Adani Group is the next to follow with an expected Rs 1.17 lakh crore investments in power projects, renewables projects, airports, roads, data centres, mining, and other areas.

JSW Steel, Tata Steel, Jindal Steel and Power Limited, Bharti Airtel, Vodafone Idea and others would be the other publicly-listed spenders on capex.

However, experts have been talking about a large-scale capex boom for a long time — predicting and timing a capex boom can be difficult.

Even with the tailwinds that are pushing credit growth ahead, there remain several factors that could destabilise the growth rate.

For instance, the current deposit growth rate is only half of the credit growth rate. If banks are unable to attract deposits, which is low-cost credit for banks, it could affect their margins.

At the same time, interest rate hikes could mean lower demand as consumers delay purchases due to a higher cost of borrowing.

The precarious international scenario, with the possibility of a recession, could throw a wrench in India’s economic machinery.

This article was first published here.