Bank credit growth could decelerate to 6.5 per cent to 7 per cent during the current fiscal from about 13 per cent last fiscal due to limited incremental credit growth, ICRA said on Thursday.

“A shift of large borrowers, such as non-banking financial companies and housing finance companies to the banking system for their funding requirements, had boosted bank credit growth in 2018-19,” the agency said in a statement on Thursday in its ‘Year End Outlook for the Banking Sector’.

It further said that factors such as muted economic growth, lower working capital requirements, and risk aversion among lenders have impacted the incremental credit growth in FY2020. According to ICRA, incremental bank credit increased only by ₹80,000 crore till December 6 this fiscal year to ₹9.8-lakh crore.

In contrast, incremental bank credit rose by ₹5.4-lakh crore and ₹1.7-lakh crore in the corresponding periods in 2018-19 and 2017-18.

The agency said that even in a high-growth scenario, where incremental credit may rise to ₹6.5-lakh crore to ₹7-lakh crore in the second half of the fiscal, it expects a 40 per cent to 45 per cent year-on-year decline in incremental net bank credit to ₹6.3-lakh crore to ₹6.8-lakh crore during this fiscal.

“This will translate to a considerable deceleration in year-on-year bank credit growth to 6.5 per cent to 7 per cent during 2019-20 from 13.3 per cent during 2018-19 and 10.5 per cent during 2017-18,” it said. The recent data on bank credit released by the RBI also showed that contraction in incremental credit outstanding to the services as well as the industrial segments offset the entire growth in credit to the retail segment during the first seven months of the fiscal, the agency said.

With regard to transmission of rates, ICRA said that as the banks have continued to cut the deposit rates since the beginning of the fiscal, it expects the cost of funds to decline further during the next one year. This, in turn, will translate to lower lending rates to spur credit growth.

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