Commercial Banking Sector
Concerns about Credit Growth:
Global headwinds at present are emanating from three sources;
- Russian actions in Ukraine impacting energy supplies and prices especially in Europe,
- Economic slowdown in China because of frequent lockdowns due to its zero-COVID policy, and
- The increased cost-of-living because of resulting inflationary pressures.
These cause a drag across economies especially in the developing world.
The ‘drag’ occurs in two broad ways.
- Firstly, lower external demand drives down export demand obligating economic growth to be solely driven by domestic demand which might not be sufficiently strong.
- Second, higher global inflation and interest rates impact the flow of capital into the economy, putting downward pressure on domestic currency and in certain circumstances, higher imported inflation.
Demand vs Credit Growth:
- As per the RBI bulletin, aggregate demand domestically bears an “uneven profile” at present.
- Urban demand appears robust and rural demand which was muted has also started acquiring some strength recently.
- Commercial bank credit growth too has been surging, led by services, personal loans, agriculture and industry, in that order.
- This reflects the growing preference for bank credit for meeting working capital requirements.
- During the pandemic, owing to lower economic activity credit growth was on a lower trajectory.
- Now with economic activity returning to normalcy, the credit growth has picked up — especially in the previous three quarters.
Deposits vs Credit Growth:
- As per the RBI’s latest weekly data for scheduled commercial banks, aggregate deposits have grown 8.2% in comparison to 11.4% on a year-over-year basis whereas credit off-take has jumped 17% in comparison to a 7.1% increase on a YoY basis.
- RBI’s November bulletin informed that gross non-performing assets (GNPAs) have consistently declined, with net NPAs sliding down to 1% of total assets.
- Liquidity cover is robust and profitability is shored up.