Rate hikes begin to slow credit growth
2 min read . Updated: 01 Mar 2023, 12:47 AM IST
PremiumCredit growth for medium-scale industries has fallen steeply to just 15.4% from 53.5% in December 2021
Mumbai: The effect of the rate hikes by the Reserve Bank of India is slowly becoming evident with bank credit growth slowing down, showed RBI data.
Credit growth rose to 16.1% in the fortnight ended 10 February, after falling to 14.9% in the fortnight ended 31 December. This is lower than the 17% plus growth seen till November 2022.
Economists said the interest rate hikes of 250 basis points since March 2022 have been transmitted to a large extent to lending rates. Consequently, growth in loan linked to external benchmarks has slowed. “The trend has been upwards in growth rate which peaked in October and then remained in the 17-18% range for four fortnights before coming down to 14.9% in the last fortnight of December. Subsequently, we have seen a recovery to the 16-17% range, though growth rate has been coming down. In a way, policy intervention has slowed down credit growth though not in a commensurate manner," Bank of Baroda said in a note published on Tuesday.
While retail credit is the major driver, it is followed by micro and small business loans. Personal loans rose by 20.2% in December from 14.9% a year ago, driven by housing and vehicle loans.
However, bankers said they are seeing incipient signs of slowdown in this segment.
“We have seen a slowdown in mortgages and loan against property in January and February. We will have to wait and see how March will perform," said an official with a private sector bank.
Though credit to industry is improving, it is muted as credit demand moderated sharply from 13% in November 2022 to 8.7% in January. Within industry, loans to MSMEs have seen a marked slowdown since the beginning of the year. While credit growth for micro and small segment has moderated from 29% in April 2022 to only 13.7% in December 2022, for medium industries the decline has been far more alarming, down to just 15.4% from 53.5% in December 2021.
“Alarmingly, credit growth to industry has been decelerating after peaking in October and remains a key area of concern. With global growth likely to slow down, exports and domestic manufacturing will also come under stress, which may dampen the credit offtake from this sector even more," Bank of Baroda said.
That said, credit growth has outperformed deposit growth in this financial year. A part of the funding gap has been met by the mobilisation of certificates of deposit, according to a Care ratings report published on Monday.
A wide gap in credit and deposit growth, lower liquidity and strong credit demand have been driving for higher issuance of CDs. On an aggregate level, banks issued CDs of Rs.5.5 Lakh crore in FY23 vs. Rs.0.9 lakh crore in FY21 and Rs.1.45 lakh crore in FY22.