CRISIL Predicts a Slowdown in Bank Credit Growth Due to Regulatory Changes and Economic Factors
In a recent report, rating agency CRISIL forecasts a decline in bank credit growth, projecting it to fall from 16% last year to 14% in the current financial year. The slowdown is attributed to a deceleration in corporate and MSME lending.
Corporate credit, which constitutes approximately 45% of total bank lending, is expected to decrease from 14% last year to 13% in 2024-25. This reduction is primarily due to banks needing higher capital requirements for lending to non-banking financial companies (NBFCs). The Reserve Bank of India (RBI) increased the risk weights for loans to NBFCs by 25 percentage points to 125% in November 2023. These risk weights mandate that banks set aside more capital for specific loan types, impacting their capacity to extend credit.
Lending to micro, small, and medium enterprises (MSMEs) is also anticipated to decline, dropping from a robust 19% growth in the year ending March 2024 to 15% in the next fiscal year. This sector had previously shown strong expansion, but the new financial conditions are expected to moderate growth.
Agricultural and Retail Credit Trends
Agricultural credit growth remains tied to monsoon patterns but is predicted to moderate following a strong fiscal 2024. Retail credit, which makes up around 28% of total bank credit, is also expected to slow, decreasing from 17% growth last year to 16% this fiscal year. The high base effect from previous strong growth, alongside regulatory changes requiring banks to hold more capital against unsecured consumer credit, will contribute to this slowdown.
CRISIL highlights that last year’s loan growth was driven by robust economic activity and retail credit demand. However, this year’s growth will be tempered by a high base effect, increased risk weights, and slightly lower GDP growth projections. The need for higher capital requirements for NBFC loans will particularly impact corporate credit growth.
Sector-Specific Insights
Despite the overall slowdown, certain sectors are expected to drive capital expenditure (capex) recovery in the latter half of fiscal 2025. The steel, cement, and pharmaceuticals sectors are predicted to lead this recovery, with emerging industries such as electronics, semiconductors, electric vehicles (EVs), and solar modules also contributing significantly over the medium term.
CRISIL notes that while there are challenges, the fundamental drivers of credit demand remain intact. A revival in private corporate capex, particularly in the latter part of fiscal 2025, could provide a positive boost. GDP growth is expected to stay solid at 6.8% in fiscal 2025, down from an estimated 7.6% in fiscal 2024.
However, deposit growth rates will also play a crucial role in influencing overall credit growth, potentially acting as a limiting factor.
Ajit Velonie, Senior Director at CRISIL Ratings, emphasizes that while the growth pace might slow, the underlying demand for credit remains strong, particularly driven by private sector industrial investments.
"Understanding CRISIL Bank Credit Ratings: Your Guide to Financial Trust and Risk"
Imagine you’re considering lending some money to a friend. You’d likely think about how reliable they are in paying back their debts, right? You’d want to know if they’ve borrowed money before and if they’ve repaid it on time. Essentially, you’d be assessing their “creditworthiness.”
Now, let’s scale this scenario up to banks and financial institutions. When banks lend money, they also need to evaluate the creditworthiness of the borrower. But instead of just asking around, they rely on professional credit rating agencies like CRISIL.
CRISIL, or Credit Rating Information Services of India Limited, is a well-known credit rating agency in India. It analyzes and rates various entities, including companies and financial institutions, based on their ability to repay loans and meet their financial commitments.
So, what exactly are CRISIL bank credit ratings?
These ratings are a tool that provides an independent assessment of a bank’s or a company’s credit risk. They help investors and other stakeholders understand how likely it is that the entity will fulfill its debt obligations. CRISIL’s ratings range from high grades, indicating strong creditworthiness, to lower grades, indicating higher risk.
How does CRISIL determine these ratings?
- Financial Health
- Management Quality
- Market Position
- Industry Outlook
- Economic Environment
Why are these ratings important?
For investors, these ratings are crucial. They provide a clear, standardized measure of credit risk, helping investors make informed decisions about where to invest their money. For banks, these ratings are used to determine the terms of the loans they offer, such as interest rates and credit limits. A higher rating typically means lower interest rates, as the risk is perceived to be lower.
