FY'23 loan growth at 11 year high despite steep hike in lending rates

Credit growth continued to outpace deposit growth in FY’23 at an eleven year high even as banks have transmitted fully -250 bps – their lending rates linked to external benchmarks which now comprise almost half of floating rate loans. Credit demand may not be linked to interest rates but more to economic activity, notings in the RBI’s monetary policy report suggest.

While bank loans rose 14.6 percent in FY’23, deposits rose just 9.6 percent. Credit growth in the last fiscal is the highest since FY’2011-12 during which credit rose 17 percent. Significantly, lending rates rose the steepest in FY’23.

Banks revised upwards their external benchmark-based lending rates (EBLRs) by 250 bps between May 2022- March 2023. in tandem with the increase in the policy repo rate. The marginal cost of funds-based lending rate (MCLR) – the internal benchmark for loan pricing – rose by 140 bps over the same period. The weighted average lending rate (WALR) on sanctioned fresh rupee loans increased by 173 bps and that on outstanding rupee loans by 95 bps between May 2022 to February 2023

The external benchmark linked loans now account for the largest share among floating rate loans, with their share increasing from 44.0 per cent in March 2022 to 48.3 per cent in December 2022. Correspondingly, the share of MCLR-linked loans declined from 48.6 percent to 46.1 per cent over the same period.

Within EBLR loans, the RBI’s repo rate is the preferred benchmark, with a share of 81 per cent of all EBLR linked loans at end-December 2022. “The significant increase in the share of repo linked loans with shorter reset periods aided the pace of transmission to WALR on outstanding loans” RBI said.

An econometric analysis of monthly non-food credit and deposit data of all commercial banks for the period April 2007-December 2022 by the Reserve Bank shows that bank deposits and credit comove over time or in other words move in tandem. “The credit growth is driven by a rebound in economic activity and is supported by an improvement in deposit growth” RBI said in its latest MPR.

” Bank credit expected to grow by 15% in fiscal 2024, supported by revival in corporate credit” said a report by crating firm Crisil. ” Leading indicators point to continued downtrend in gross NPAs and could touch 3.8% by March 2024″Even ratings firms seem to agree with Reserve Bank. ” Credit growth is expected to be in sync with the GDP growth in FY24″ said a report by Care Edge Ratings. ” Further, a slowdown in global growth due to rising interest rates, and rate hikes in India could impact credit growth”.

The current pace of lending growth may not be alarmist. “Despite the buoyancy in bank credit in 2022-23, the credit-to-GDP gap remains negative” RBI said in its latest monetary policy report.