Indian Banking Sector Credit Growth to Surpass GDP in FY 2024-25

Credit growth in the Indian banking sector is projected to exceed nominal GDP growth in FY 2024-25, driven by economic growth, digitalization, and infrastructure activities, according to SBI Capital Markets. Challenges include the role of the Reserve Bank of India's countercyclical measures and the pressure on capital ratios.

Credit growth in the Indian banking sector is expected to outpace nominal GDP growth in the financial year 2024-25, rising at a rate of 13-15 percent, as per a report from SBI Capital Markets. Nominal GDP represents economic growth without adjustments for inflation.

The report indicates that this growth will be driven by key factors like economic expansion, formalization, digitalization, and higher capacity utilization leading to capex. Increases in MSME credit and heightened infrastructure and construction activity are also poised to boost the industry segment, potentially achieving high single-digit growth, surpassing last year's performance.

SBI Capital Markets, established in 1986 as a subsidiary of the State Bank of India, noted in its report, "While public sector banks continue to lose market share to private banks, the gap has narrowed due to better-capitalized balance sheets and a robust deposit base."

The report describes banks as the beating heart of the Indian economy, enjoying record high profits and exceptional credit growth. It queries whether credit growth will sustain in the face of the RBI's countercyclical operations, or if a deposit shortfall could pose risks. It also questions the stability of key indicators like asset quality and capital.

Industry credit has grown at a compound annual growth rate (CAGR) of 5 percent over the last five years, slower than the overall banking sector credit growth of 10 percent. Interestingly, Non-Banking Financial Companies (NBFCs) have seen faster credit growth compared to banks. The report attributes the slower credit growth to large private companies funding their capex from profits, capital markets, and global partnerships.

The report further details that infrastructure projects are increasingly financed by key financial institutions in early stages and the capital markets for operational stages, while government capex is primarily funded through budget allocations. This has limited bank infrastructure loans to a 5 percent CAGR recently. Proposed project loan provisions might extend this period of moderate growth. The regulator has taken steps to boost risk weights for certain personal and NBFC loans, potentially impacting capital ratios and growth in the second half of 2023-24.

(With inputs from agencies.)