Rate hikes, base effect may temper credit growth in medium term: Analysts
Even as an economic upturn may keep the demand for loans robust in the next few quarters, multiple interest-rate hikes and the base effect may moderate credit growth year-on-year in the medium term.
Soumya Kanti Ghosh, group chief economic advisor of SBI, said the analysis indicates that due to rate-hike cycle, the interest cost on retail and micro, small and medium enterprise (MSME) consumers will increase to around Rs 68,625 crore. A 1-basis point (bp) increase in the repo rate will have a combined impact of Rs 305 crore on consumers — both retail and MSMEs. This may impact demand, said Ghosh in a research note.
With 47 per cent of the loans benchmarked to the external benchmark lending rate, the increase in the repo rate to 225 bps (including Wednesday’s 35-bp hike) will eventually increase interest cost further, he added.
Sanjay Agarwal, senior director, CARE Ratings, said lending rates in the banking system are still below pre-pandemic levels. So the growth trend will continue for some more quarters.
However, the benefit of a lower base will ease in the next few months, optically leading to lower growth rates.
A slowdown in global growth due to rising interest rates, interminable pandemic restrictions in China, and multiple rate hikes in India could impact credit growth, he added.
Credit growth stayed robust in October this year amid significant rise in interest rates. The growth was also broad-based across segments and likely to remain strong in the rest of 2022-23.
Retail and non-banking financial companies are expected to be key growth drivers for the fiscal year. Besides, demand for new capital expenditure will likely drive the industry’s credit growth.
A senior private sector bank executive said in the normal course, credit growth will slow down in response to rate hikes in nine to 12 months and the base effect. The actual demand for credit will depend upon expectations around asset prices and the capacity to service loans.
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