Credit growth in India is expected to exceed nominal GDP this fiscal year: SBI Capital Markets

According to SBI Capital Markets, credit growth in the Indian banking sector is expected to exceed nominal GDP growth in the current financial year 2024-25, growing at 13-15 per cent.

Nominal gross domestic product (GDP) is growth without adjusting for inflation. According to the report, growth will be driven by faster economic growth coupled with long-term drivers such as formalization, digitalization and premiumization.

Higher capacity utilization across sectors, capital expenditure, pick-up in MSME credit, and increase in infrastructure and construction activity are expected to boost the industry sector, which could potentially achieve high single-digit growth in 2024-25 , which will surpass the performance of 2023-24. SBI Capital Markets, incorporated in 1986 as a wholly owned subsidiary of State Bank of India, is one of the oldest investment banks in India.

“Although PSBs (public sector banks) continue to lose their share to PVBs (private sector banks), the pace has slowed down as the former are now equipped with well-capitalized balance sheets and reserves of deposits ” Report released by SBI Capital Markets earlier this week.

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Describing banks as the heartbeat of the Indian economy, the report said they are seeing excellent blood flow – record high profits and excellent credit growth. “As the block of bad assets is cleared, asset quality and capital health have improved.

The question arises – will credit growth continue amid the RBI’s counter-cyclical operations, or will there be a depletion of life-sustaining deposits? Will the key things (asset quality, capital) remain stable, and can the profit pulse pick up further?” SBI Capital Markets has analyzed some of these aspects in the report.

Industry credit has grown at a CAGR (compound annual growth rate) of 5 per cent over the last five financial years, which is lower than the overall bank credit CAGR of 10 per cent. Interestingly, NBFC credit growth continues to outpace bank credit growth.

It said the reason for slow credit growth is that large private corporates are avoiding bank loans – their capital expenditure is being funded by abundant profits, capital markets are attracted by their healthy accounts, and global Through financial tie-ups with capital-rich partners.

“Infrastructure projects are increasingly funded by major financial institutions in the initial stage and capital markets (bonds, InvITs) for operational projects. Government capital expenditure is funded primarily by budgetary allocations with some MLI support. These factors have limited the growth of bank infrastructure credit to 5 per cent in recent years.

The proposed project loan provisions may extend this period of moderate growth,” it said. These developments have prompted the regulator to take countercyclical measures and increase risk weights for certain categories of loans within individual loans as well as loans given to (and by) NBFCs.

This may have a marginal impact on the capital ratio, and growth in these sectors may moderate slightly in the second half of 2023-24.

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