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Synopsis

* Credit offtake continued to grow, increasing by 20.0% year on year (y-o-y) to reach Rs. 151.5 lakh crore for the fortnight ended Sep 22, 2023. This surge continues to be primarily driven by the impact of HDFC’s merger with HDFC Bank and growth in personal loans. Meanwhile, if merger impact is excluded, credit grew at a lower rate of 15.3% y-o-y fortnight compared to last year. The outlook for bank credit offtake remains positive, with a projected growth of 13-13.5% for FY24, excluding the merger's impact.

* Deposits too witnessed growth, increasing by 13.2% y-o-y for the fortnight (including the merger impact). However, sequentially we saw a decline of 0.6% as the effect of the Rs 2,000 note deposit started to fade and liquidity remains challenged. Deposit growth is expected to improve compared to current trends in FY24 as banks look to shore up their liability franchise and ensure that deposit growth does not constrain the credit offtake.

* The Short-term Weighted Average Call Rate (WACR) stood at 6.75% as of September 29, 2023, compared to 5.52% on September 30, 2022, due to pressure on short-term rates

Bank Credit Growth Remains Elevated

Figure 1: Bank Credit Growth Trend (y-o-y %, Rs. Lakh crore)

* Credit offtake increased by 20.0% year on year (y-o-y) and a sequential improvement of 0.8% for the fortnight ended Sep 22, 2023. It is important to note that the y-o-y figures are not directly comparable, as the data reported by the RBI as of Sep 22, 2023, includes the impact of the merger of HDFC with HDFC Bank. In absolute terms, over the last twelve months, credit offtake expanded by Rs. 25.2 lakh crore to reach Rs. 151.5 lakh crore as of Sep 22, 2023. Excluding the impact of the merger, the growth stood at 15.3% yo-y for the fortnight. This growth continues to be primarily driven by continued demand for personal loans and NBFCs.

* The outlook for bank credit offtake continues to remain positive for FY24, supported by factors such as economic expansion and a continued push for retail credit which has been supported by improving digitalisation. CareEdge estimates that credit growth is likely to be in the range of 13.0%-13.5% for FY24, excluding the impact of the merger of HDFC with HDFC Bank. The personal loan segment is expected to perform well compared to the industry and service segments in FY24. Furthermore, as the Credit to Deposit (CD) ratio remains elevated, growth in the liability franchise would play a significant role in sustaining loan growth. However, elevated interest rates and global uncertainties could potentially impact credit growth in India.

Figure 2: Bank Deposit Growth (y-o-y %)

* Deposits rose at 13.2% y-o-y for the fortnight (reported Sep 22, 2023) and declined by 0.6% sequentially. Without considering the merger, deposits rose by 12.8% y-o-y. Meanwhile, in absolute terms, deposits expanded by Rs. 22.4 lakh crore and reached Rs. 192.8 lakh crore as of Sep 22, 2023, compared to Sep 23, 2022.

* According to CareEdge Economics in The Economic Pathway, banking system liquidity turned to deficit on account of likely RBI FX intervention, healthy credit demand and tax outflows. Given concerns of elevated inflation, RBI would prefer to ensure there is just enough liquidity to meet credit demand (festival season) in the coming months. Healthy government spending and redemption of government securities in the coming months could aid in maintaining a balance. RBI could conduct VRRR auctions during periods when call rates touch upper end of the LAF corridor i.e., MSF rate of 6.75%

Figure 3: Credit to Deposit (CD) Ratio Trend – Includes Merger Impact

* The CD ratio has been generally hovering above 75% since December 2022. The CD ratio saw an uptick of 102 bps, due to robust credit performance, compared to the previous fortnight and stood at 78.6% in the fortnight (Sep 8, 2023), reaching to a two year high, meanwhile the y-o-y growth was approx. 445bps (Impacted due to HDFC merger)

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