Finance debt

Bank credit is on the rise, but will it hold up amid the Covid resurgence?

Bank credit has been on the rise in recent months, indicating a resumption of economic activity, but the resurgence of Covid-19 cases and limited lockdowns are raising new concerns.

Data from the Reserve Bank of India shows that year-over-year growth in non-food bank lending was 6.5% in February. This is not so bad compared to a growth of 7.3% in February 2020.

But the ongoing lockdowns are expected to have an impact on credit growth. CARE Ratings put the potential loss of GVA to the country due to the one-month lockdown of Maharashtra at around 40,000 crore in real terms.

Among the sectors, the growth of credit to agriculture and related activities, services and personal loans recorded a strong expansion. However, credit to industry contracted slightly by 0.2% in February against a growth of 0.7% in February 2020 “mainly due to the contraction in credit to large industries of 1.5%”, RBI data showed.

Bankers expect demand for credit from major industries to pick up in the second half of the year with the investment surge in the Union budget.

Between the end of March 2020 and February 2021, gross bank lending rose 3.3% from 3.5% last year, which analysts say is quite robust given the foreclosure of the first quarter of 2020-2021.

Provisional data from banks for the fourth quarter on loans and advances showed improvement over previous quarters since the pandemic.

HDFC Bank reported 13.9 percent growth in advances as of March 31 from a year ago, while gross advances to the Federal Bank increased nine percent over the same period. Growth in advances for IndusInd Bank and YES Bank has been more modest.

RBI Policy

As the Reserve Bank of India’s Monetary Policy Committee is expected to maintain its accommodative stance and maintain the status quo on rates, there may be continued demand for credit.

More clarity on the economic outlook will be available on April 7 when the RBI releases the monetary policy statement.

Bank credit growth is expected to accelerate to 9-10% in the new fiscal year after average single-digit growth in fiscal 2021, according to the rating agency Crisil, but it warned that the strong increase in Covid-19 cases since mid-February and the impact of any strict containment measures on businesses are the main threats to the nascent recovery in demand and could have a negative impact on the outlook for credit quality.