Even with rising interest rates, bank borrowing is increasing: services are leading

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Borrowing in the banking system is showing signs of recovery at a time when interest rates are rising. The annual growth rate of bank loans topped the 12 percent mark to 12.1 percent as of May 20, 2022, up from 6 percent growth in the same period last year, according to the latest Reserve Bank data.

In absolute terms, bank lending increased by Rs 13 lakh crore to Rs 120.27 lakh crore on May 20 compared to Rs 6.08 lakh crore a year ago.

Bank lending to the service sector and personal loan segment has grown faster than other segments. While borrowing by the service sector increased by over Rs. 3 crore, the personal lending segment, which includes home, vehicle and credit cards, rose by over Rs. 3.4 crore.

“Bank borrowing has gradually improved in recent months, helped by both the resilience of the banking system and the ongoing normalization of economic activity,” RBI Governor Shakkanta Das said as he unveiled monetary policy last week. The RBI has increased the repo rate by 90 basis points since May this year, making it more expensive for borrowers to borrow through the repo-linked lending rate (RLLR). However, credit growth may falter if the economy fails to improve and government and industry investment plans slow, a bank official said.

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According to CareEdge, this (credit growth) was driven by the low-base effect, the shift to bank lending due to high capital market interest rates, the continued increase in personal loans and higher working capital requirements due to increased inflation. Retail growth was relatively high due to improving job market and economic activity.

After modest credit growth in recent years, the outlook for bank credit growth is expected to remain positive due to economic expansion, pick-up in government and private capital spending, rising commodity prices and the surge in retail credit. “The medium-term outlook looks promising with reduced corporate stress and a significant buffer for provisions. CPI inflation is also trending higher, which is likely to contribute to credit growth,” it said.

On the other hand, rising interest rates could offset that growth to some extent by dampening credit demand, CareEdge said. The personal loan segment should perform well relative to the industrial and service segments.

Explained

positive outlook

After modest credit growth in recent years, the outlook for bank credit growth is expected to remain positive due to economic expansion, pick-up in government and private capital spending, rising commodity prices and the surge in retail credit.

The ongoing war between Russia and Ukraine should have only a limited impact on credit growth in India. Meanwhile, any subsequent Covid-19 variants, if severe, could lead to lockdowns and cause the economy to slow down.

With the introduction of the external reference interest rate, the transmission rate will be faster and higher.

Furthermore, deposits in the banking system have already started to move up from extremely low levels and this is again being transferred to higher MCLR for wholesale lending.

“The sensitivity of the interest rate to aggregate demand has increased significantly. Therefore, a faster and higher transmission of the interest rate could become onerous for some of the borrowers. The situation will worsen if real income does not improve,” says a report by India Ratings.

On the other hand, deposit growth remained sluggish at 9.3 percent (14.07 lakhcrore) on May 20 this year, compared with 9.7 percent a year ago, even as interest rates began to rise.

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