Credit growth over 18% may create risk

The central bank has been advising banks to review business strategy to make it sustainable with credit growth outpacing deposit mobilisation for a long period of time.

“Despite the divergence in credit and deposit growth, elevated credit-deposit ratio and narrowing credit-GDP gap, credit growth at 16.1% as on May 31, 2024 remains sustainable and within the range of 16-18% beyond which it may lead to higher impairments,” RBI said in the latest financial stability report released Thursday.

Chasing higher growth could also lead to dilution of underwriting standards, as often seen in the past.

The growing gap between credit and deposit growth is reflected in a rising CD ratio, which has been on the rise since September 2021 to peak at 78.8% in December 2023 before moderating to 76.8% at end-March 2024. The ratio was particularly high for private sector lenders with over three-fourths of the banks having it above 75%.The credit expansion has outpaced nominal GDP growth for seven consecutive quarters, leading to narrowing credit-GDP gap — a difference between the credit-GDP ratio and its long-term trend — to a negative 2.1% in the third quarter of the last fiscal from a negative 7.4% in the year-ago quarter.To be sure, the central bank had already taken regulatory measures to curb growth of unsecured retail lending and growth in banks lending to NBFCs.

“Advance action is initiated wherever we notice or smell a crisis,” Governor Shaktikanta Das said last week. “We thought it is better to act in advance and slow down the credit growth in these segments, because we could clearly see some evidence of dilution of underwriting standards… the mentality to join the bandwagon.”

The share of retail and service sectors in total bank credit has been rising for over two decades. During April 2022 and March 2024, bank lending to the retail sector grew at a compounded annual growth rate of 25.2% and lending to services – which includes bank lending to NBFCs – grew at 22.4%, far exceeding overall credit growth of 16.4%.

Following RBI’s action, sequential growth in retail lending fell to 2.9% in the fourth quarter of FY24 from 4.4% in the first quarter.

Growth in bank lending to NBFCs was another area of concern, which prompted the central bank to take regulatory measures in November 2023, following which growth in bank lending to NBFCs has moderated to 14.6% in April 2024 from 18.9% in November 2023. The share of bank lending to NBFCs has dipped to 9.4% of total bank credit as of end-April 2024, down from its peak of 10% in June last year.