Moneycontrol Pro Panorama | Giving credit where it is due

Retail credit has slowed sharply after unsecured lending was clamped down on.

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The power of credit runs the world. This may sound anywhere between reckless to audacious, but if we carefully look at how money is created, stored, or even morphed to other things, our conclusion would be the same. Governments run on credit (ask the bond market), households run on borrowed money (ask yourself) and even religious institutions prosper by asking/borrowing funds (what is a donation, but credit forfeited).

More than savings, it is the saved money that gets lent which is important. That is why a slowing domestic deposit growth that occupied market chatter and thinking last year was not as big a concern as the sharp slowdown in bank credit growth currently is. India’s non-food credit growth was a worrying 9.3 percent as of June end, the lowest since March 2022. Note that financial years FY22 and FY21 were emerging from a debilitating pandemic and there is no crisis of that magnitude this time.

What is ailing credit growth? It is both a demand and a supply problem.

After a combination of rising stress and regulatory crackdown on unsecured lending, banks have become cautious and tightened their underwriting process. This came about simultaneously with the deposit growth slowdown. While investors have focused on the constraints on credit due to low deposits, they have missed the point of a change in sentiment. We looked at how deep is the credit slowdown in this July 3 piece and found that segments where stress has risen have seen the sharpest decline. Unsurprisingly, small businesses have powered credit growth for the past many months and the evidence of this was also found in Axis Bank’s first quarter performance.

The private sector lender reported a dismal set of metrics on both growth and profitability, and we explain here
and here what ailed Axis Bank. The bank’s performance has rattled investors, but it is merely showing the aftereffects of a sharp loan growth slowdown which is an industry-wide problem. As other lenders begin to detail their quarterly numbers, investors would need to assess whether there is a turnaround sooner or later. Needless to say, FY26 is unlikely to be a good year for BFSI and that puts the outperformance of the Bank Nifty over the past six months at risk.

Can the banking regulator fix this as it has done many times in the past? To an extent, the Reserve Bank of India’s policy rate cuts and mainly its approach to liquidity are towards boosting credit growth. Analysts at HSBC point out that the central bank cannot do the heavy lifting here. A long-lasting solution lies in the real economy.

Consider the segments hard hit in the current credit growth slowdown. Retail credit has slowed sharply after unsecured lending was clamped down on. Of course, part of this is by design and desired in the name of financial stability. But the cyclical slowdown in gross domestic product (GDP) is also a key reason. The loan offtake to companies has slowed too which is a direct fallout of slowing growth. While soft GDP growth can pull loan growth down, the opposite is also true.

What can policymakers do? The RBI on its part has already reduced the cost of money, interest rates, to spur borrowing. Its liquidity toolkit, now fortified with multiple auctions has continued to manage money flow and keep market yields benign. Our Chart of the Day highlights this. Is this enough? HSBC analysts do not think so. “Because just as the deposit composition issue had its roots in the real economy, the credit softness issue does too. Weaker GDP growth has lowered the demand for credit. And more importantly, the pivot from formal to informal sector growth has played a role too,” they wrote in a report.

How can we exit this doom loop of lower credit growth dragging GDP lower and that in turn dragging down loan growth? The government needs to step in, too. “At a time when global supply chains are getting rejigged, if India can do the right reforms, it could become a meaningful producer and exporter of goods, which could spur investment, credit, and GDP growth. The reforms include lowering tariff rates, signing trade deals, welcoming FDI inflows, and improving ease of doing business,” the HSBC report says.

Meanwhile, what awaits the market is a barrage of quarterly performances of banks and non-bank lenders that may reveal the troubling decline in credit offtake and pressure on profitability margins. FY26 may well be a year of consolidation for financial firms.

Investing insights from our research team

Wipro Q1 FY26: A quarter of positive surprises

Weekly Tactical Pick – This housing finance company offers valuation comfort

Indian Hotels Company: Growth momentum to sustain

LTTS Q1 FY26: What to expect from the stock after muted quarterly numbers?

360 ONE Wealth delivers a healthy Q1, what holds next?
What else are we reading?

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Can finance put a stop to AI data mining? (republished from the FT)

Vault Matters: Why RBI should play a more proactive role as a supervisor

India’s EV Surge: Charging ahead or running on empty?

A Rajya Sabha nomination from Kerala reignites the debate on political violence in the state

India’s Credit Divide: Formal access grows, but informal borrowing persists

Why interoperable netbanking is the next big leap for India’s payments infrastructure

Markets

Fund Manager Survey: Sentiment turns most bullish since 2024; India slips to fourth rank in Asia, according to BoFA

Technical Picks: RIL, JSWSTEEL, SUMITOMO, HDFCBANK  

Aparna Iyer
Moneycontrol Pro