Expansion in public sector banks’ (PSBs) credit is crowding in credit growth from private sector banks (PVBs), with the banking system ending FY22 with an incremental credit growth at ₹10.5 lakh crore, 1.8 times higher than the growth of ₹5.8 lakh crore in FY21, according to State Bank of India’s economic research report Ecowrap.

“Once this trend turns into a self-fulfilling prophecy, the economy stands to benefit. Consider this, in FY22, the weighted contribution of PSBs in overall credit growth was as much as 43 per cent.

“This is steady rise from the lows of 27 per cent in FY19. Simultaneously, the share of PVBs in credit growth has declined from 65 per cent to 47 per cent for the year ended FY22,” the report said.

In the past, whenever credit growth turned the corner and jumped from single digit to double digit, the share of PVBs has always jumped commensurately, noted the Economic Research Department’s (ERD) team.

“It seems that the PSBs are always early movers at the beginning of a pick up in credit cycle and later becomes all pervasive when the PVBs join the bandwagon.

“However, the latest trends indicate that PSBs have been continuously chipping away on the back of a robust asset quality and also some of the credit initiatives that were launched during pandemic. This healthy competition could bring in new rules of the game as we move towards the rebuilding phase, post pandemic,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Ghosh observed the share of incremental bank credit in incremental nominal GDP, which was as high as 63 per cent in pre-pandemic year (FY19), plunged sharply to decade low of 27 per cent in FY22. The average share was 50 per cent for 7 year period ended FY20.

“A higher credit-to-GDP ratio indicates aggressive and active participation of the banking sector in the real economy, while a lower number shows the need for more formal credit.

“For FY23, we believe that share of bank credit may again breach the 50 per cent mark indicating the increasing role of banks in economic growth,” noted the report.

Impact of rate hike

ERD underscored that even as the outlook of credit growth looks positive in FY23 also, the current inflation trends could play a spoilsport as rate hikes could have a dampening impact on credit demand just as the economy has been turning round the corner.

An RBI study (RBI Working Paper Series No. 14) indicates that an increase (decrease) in policy rate by 100 basis points causes the credit to decline (increase) by 1.95 per cent with a lag of six quarters, it added.

“Our regression results involving credit growth and policy rate (monthly data from January 2009 to April 2020) reveal that an increase (decrease) in policy rate by 100 basis points causes the credit to decline (increase) by less than 1 per cent,” Ghosh said.

However, ERD believes, a constellation of factors like significant weakening of growth prospects in China could act as favorable conduits of a not so aggressive pace of rate hikes by central banks around the world, including RBI. Oil is likely to correct below $100, with even sub-$90 looking a possibility.

According to Ghosh’s assessment, the 10-year domestic yield has already retreated sharply and could head sub-7 per cent (6.85-6.9 per cent might be threshold) as real economic activity slows down following the prolonged geo-political conflict.

“US 10-year yields have already softened sharply, perhaps indicating what the future holds in store! Ultimately, as an RBI study suggests, yields are a function of real economic activity!,” he added.

FY22: Segment-wise credit

Segment-wise, the jump in credit to MSMEs (micro, small and medium enterprises) and infrastructure was strong at ₹2.3 lakh crore while credit to Housing and NBFC (non-banking finance company) sector was close to ₹2 lakh crore.

Retail loans expanded by a sharp ₹3.7 lakh crore, driven by a surge in personal loans apart from housing credit. Credit to agriculture was at ₹1.3 lakh crore.

“It seems that the economy was able to shrug off, to a large extent, the after-effects of the pandemic as credit growth was broad-based across all sectors,” Ghosh said, adding this interesting pattern in credit growth augurs well for FY23.

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