Global brokerage firm Jefferies expects the loan growth of Indian banks to moderate in the next 3–4 months as it believes that the factors which led to the increase in credit growth are now fading.
The brokerage identified three key factors that led to an increase in India's bank credit growth over the past five months.
Firstly, the brokerage noted that commercial inflation (WPI) had risen to its peak of 17%, which led to an increase in credit demand with some lag. This was further amplified by a tighter global supply chain, leading to higher stocking.
Second, the brokerage observed that increasing local rates and tighter liquidity had affected access to bonds, which constitute 23% of corporate credit in India.
Thirdly, tightness in global liquidity has affected the accessibility of external funding sources, such as the ECBs, where issuances have decreased in the last six months. As a result, banks gained market share, leading to a rise in credit growth.
However, the brokerage anticipates that the triggers that lifted bank credit growth are moderating, albeit at different paces.
The brokerage firm stated that there is a strong correlation between credit growth and WPI, with a 6-month lag. The WPI reached its peak of 17% in May 2022 and has now declined to 5%. This may reflect in lower working capital credit demand from May-July 2023.
In addition, access to domestic bond markets will improve once interest rates stabilize, as this will increase inflows into mutual funds debt products, that own 35-40% of corporate bonds.
Additionally, a steady rupee and stable global rates are expected to make Indian corporates more receptive to ECBs. However, Jefferies believes that this scenario is still some time away.
Therefore, the brokerage is expecting the bank credit growth, which is currently at 16–17%, to moderate towards 13–14% over the next 3–4 months.
Over the longer term, banks’ deposit growth has been quite stable in the range of 8–11%, whereas credit growth oscillates in a wider band of 5%–17%, reflecting divergence in demand and supply trends.
Currently, banks’ deposit growth of 10% is significantly lower than credit growth of 16%, but the brokerage expects this gap to narrow with moderation in credit growth.
The reduction of the difference between the growth rate of deposits and the growth rate of credit can ease investor worries about liquidity constraints and also create an opportunity for banks to lower high-term deposit rates, particularly in the wholesale market.
This would be particularly positive for banks with a higher dependence on wholesale deposits as well as NBFCs. "We recommend investors readjust their weight away from banks to NBFCs. Our top picks among NBFCs are BAF, Chola, and Aavas," said Jefferies.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.