Our expectation of a sharp deceleration in the year-on-year (YoY) growth in bank credit to 6.5-7.0 percent in FY2020 from 13.3 percent in FY2019 is in sync with our forecast that the real GDP growth will decelerate sharply to 5.3 percent in FY2020 from 6.8 percent in the previous year.
The YoY credit growth in the retail segments for banks has been strong at 16.4 percent as of November 2019. However, excluding the relatively larger retail loan portfolio buyout by banks from NBFCs and HFCs during the last year, the YoY growth is estimated at a lower 11-12 percent, as compared to the 17 percent YoY growth as on November 2018, clearly reflecting the weakening consumer demand.
Similarly, the YoY credit growth across various segments of industry (small, medium or large) declined further to a tepid 2.4 percent, even on the back of the low base of November 2018, when the YoY credit growth was just 4 percent.
Collectively, these two segments are estimated at a substantial ~60 percent of bank credit. A boost to credit demand from these two segments will have a multiplier effect on consumer demand and the investment cycle of corporates, thereby providing a boost to GDP growth.
Though the recent cut in corporate tax rates will eventually improve the appetite of corporates for undertaking new investments, modest consumption growth is likely to result in a deferment of investment in fresh capacity in many sectors. Accordingly, the demand issues need to be addressed, in our view, even as the banking system is well placed to support the credit supply.
After the sizeable capital infusion of Rs 2.66 lakh crore in public sector banks (PSBs) in FY2018-20, their capital position has improved relative to the period up to FY2017.
Supported by capital infusion and increased provisioning on stressed loans, we expect the remaining PSBs to also exit the prompt corrective action framework of the RBI, and most of them to turn profitable in FY2021.
Accordingly, capital requirements are expected to be limited to Rs 10,000-20,000 crore during FY2021 for 8-10 percent credit growth by PSBs.
Since the capital requirements are not sizeable, and we expect the banks’ earnings to improve, this amount can be raised by the banks themselves from the markets, in our view.
However, in case the government decides to provide capital for enabling the PSBs to transition to IND-AS, which will require banks to make credit provisions on an expected loss basis for a standard, but overdue exposures, we expect the capital requirements of PSBs to be significantly higher. As per our estimates, PSBs could require Rs 70,000-1 lakh crore for the transition to IND-As.
The growth in the NBFC/HFC loan books has been lower in FY2020 as compared to the five-year average, largely owing to funding challenges faced by the NBFCs/HFCs. Retail borrowers have also been adopting a wait-and-watch policy, especially in the case of home loan purchases, given funding issues of developers and HFCs.
Increased tax incentives for first-time homebuyers such as extension of additional tax deduction for interest paid on loans borrowed beyond March 31, 2020, and increased allocation under PMAY could help boost the demand for housing loans, especially in the affordable-housing segment.
Moreover, increased allocation under the Affordable Housing Fund (AHF) will provide long-term funds to HFCs/banks for housing loans.
Additionally, an extension of the partial credit guarantee scheme for first loss beyond June 30, 2020, for the purchase of high-rated pooled assets of NBFCs, could help in improving the fund flow to the NBFC/HFC sector.
Further, in line with the government’s focus on infrastructure growth, a Credit Guarantee Enhancement Corporation for infrastructure financing could be set up as announced in the previous budget, and there could be more clarity on the role of government-sponsored NBFCs in infrastructure financing space.
(The author is Vice President & Sector Head-Financial Sector Ratings, ICRA Ltd)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.