India's credit growth projected to remain weak in range of 5-6% in FY17: ICRA

India's credit growth is expected to remain weak in the range of 5 to 6% by the end of fiscal year 2016-17 (FY17) on account of muted credit demand and debt markets continuing to be favourite among loan buyers, said ICRA on Monday.  

The ratings agency further said that the country's bank deposit growth is likely to ease to 12% by end of March 2017 and the credit growth is expected to remain similar to the current levels. 

“Credit growth is likely to remain muted at 5-6% at the end of FY17, as demand is yet to display a revival and the debt markets continue to offer more attractive pricing. Deposit growth is likely to drop from the current levels of 14.7% to around 12% at end-March 2017. Firstly, the improvement in cash availability would enable continued Current Account Saving Account (CASA) withdrawals over the rest of this quarter. Moreover, banks have reduced their deposit rates, amidst low credit pickup and the surge in systemic liquidity.” ICRA senior vice president and group head-financial sector ratings Karthik Srinivasan, said in  press release. 

Prime minister Narendra Modi's demonetisation move on November 8 to scrap old currency notes of Rs 500 and Rs 1,000 to curb black money, terrorism and corruption resulted in rise in bank deposits into the country. 

The banks deposit growth on year-on-year (y-o-y) basis spiked from 11.3% on September 30 last year to 15.2% on December 23 last year before easing to 14.7% on January 6, 2017, on the back of the sharp uptick in deposits in the corresponding reporting fortnight of January 2016.

“Deposits of the banking system surged sharply after the note ban from Rs 101.4 trillion as on September 30, 2016, to Rs 105.2 trillion on December 23, 2016, and further to Rs 105.8 trillion on January 6, 2017,” cited ICRA in a statement. 

ALSO READ: Demonetisation: United Bank of India sees credit growth at 7-8% by end of FY17

According to ICRA, non-food bank credit growth on a year-on-year (y-oy) basis collapsed after the note ban, from 10.6% on September 30, 2016 to 5.3% on December 23, 2016, and further to 5.1% on January 6, 2017. 

“Aggregate non-food bank credit eased from Rs 74.4 trillion as on September 30, 2016, to Rs 72.4 trillion on December 23, 2016, before rising modestly to Rs. 73.1 trillion on January 6, 2017,” it said. 

ICRA further said that even though banks recently announced rate cut in their lending rates, the rates offered by the debt capital markets remain lower than bank rates.  

Bonds and Commercial Paper (CP) continue as important sources of funds for higher rated entities, as the flows into key investor segments such as mutual funds and insurance companies remain high, it added.

The issuance of absolute Commercial Paper (CP) recorded 17.3% year-on-year (y-o-y) rise in growth in the third quarter (Q3) of FY17 that ended on December 2016. Similarly, the corporate bonds outstanding witnessed a 19.1% year-on-year growth in December 2016.

Accordingly, bonds and Commercial Paper(CP) outstanding are now as large as 36.4% of the banking system credit as on December 2016 (32.3% as on December 2015), it  noted.

“Notwithstanding the continued growth in the amount outstanding of bonds and Commercial Paper (CP), the slowdown in the bank credit pulled down the aggregate lending growth from 12.7% in December 2015 to 8.3% year-on-year in December 2016,” ICRA said in a statement. 

The ratings agency does expect any significant pick up in the aggregate lending growth from the current levels for FY17. 

ALSO READ: Q3 review: Credit growth, weak NII, fee income to impact banking sector