Mumbai, Sept. 13: A crisis appears to be brewing in the banking industry as the economic slowdown has squelched demand for credit from the corporate sector.
Global brokerage Bank of America-Merrill Lynch today forecast that the growth in bank lending this fiscal was likely to tumble to a 14-year low at 14 per cent.
The report said there were clear signs of a weak demand from industry for loans and working capital because of the slowing macro-economy.
The growth in non-food credit, which constitutes around 98 per cent of bank loans, has decelerated from 22.1 per cent at the start of 2011-12 to 16.8 per cent at the end of last fiscal on account of high interest rates and the economic slowdown. The RBI has projected non-food credit of commercial banks to grow 17 per cent this fiscal.
However, with the slowdown persisting and industrial activity not showing any major signs of improvement, loan growth for the banking sector has fallen below 17 per cent in August against 19-20 per cent in the recent past.
According to Rajeev Varma and Veekesh Gandhi, analysts at Bank of America-Merrill Lynch, non-food credit has been slowing sharply led by a sluggish industry demand. However, the growth has been sustained because of agriculture, large companies and retail. The analysts added that demand for loans from SMEs has slowed to less than 10-12 per cent.
While the large industry is still showing a growth of around 20 per cent, the global financial major said this was because of the drawdown of past projects under implementation and working capital demand from rising crude prices and domestic input costs.
Bankers concede that loan growth from the corporate sector will be a challenge over the coming months and a mere rate cut from the RBI will not be enough to turn around the sentiment.
“What is essential is some definite action from the central government to kickstart investments in the corporate sector,” said a senior official with a public sector bank who did not wish to be identified.
Lenders led by the SBI have trimmed their lending rates in a bid to boost their lending portfolio. They have also brought down deposit rates amid comfortable liquidity and easing of loan growth. It is felt that such lending rate reductions may continue as credit growth weakens further. The lending rates are falling even though the central bank has chosen not to cut the policy rate aggressively as it continues to battle inflation.
However, the slowing loan growth has implications for banks’ net interest margins, the analysts warned. “The sharp moderation in loan growth in the coming quarters is likely to have more visible implications for both rates and bank margins,” they added.