Even though the current level of non-food credit has increased rapidly in recent months, Indian bankers have differing expectations for future loan growth. Although banks are optimistic, some expect loan growth to slow over the next six months, according to a report by the Federation of Indian Chambers of Commerce and Industry (Ficci) and the Indian Banks’ Association (IBA).

According to the fifteenth round of survey by Ficci and Indian Bank’s Association (IBA) conducted between January and June 2022, 48% of banks expect non-food industry credit growth to be above 10%, 24% expect growth to be in the range of 8-10%, and the remaining 28% expect it to be below 8%. The survey included 25 banks from the public, private, and foreign sectors, representing approximately 76% of the banking industry in terms of asset size.

According to the latest Reserve Bank of India (RBI) data, credit growth in the banking sector was 15.8% year on year (y-o-y) as of the fortnight that ended August 12. With this, bank credit increased by 15% for two consecutive fortnights, continuing a trend of growth of more than 10% since June. Credit growth was 14.2% in the quarter that ended June 30, up from 6% the previous year.

“Major infrastructure development plans have been in place by the government to facilitate quick capital spending with a strong multiplier effect. This is likely to spur demand for infrastructure financing,” the report said.

According to the survey, 74% of banks anticipate an increase in infrastructure loans. Long-term loans to the metals, chemicals, food processing, pharmaceuticals, auto, and real estate sectors, among others, have increased. Most banks anticipate that credit standards for large enterprises will remain unchanged, compared to 78% in the previous round.

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Despite the fact that personal loan growth outpaces other segments, the RBI’s sectoral credit data shows an increase in loans to industry, with loan growth to infrastructure companies at 9.5% in June. With capacity utilization currently at 75%, the corporate is expected to put its sanctioned loans to use, according to State Bank of India (SBI) chairman Dinesh Khara, following the bank’s Q1FY23 results.

According to the report, the majority of banks have seen an increase in current account and savings account (CASA) deposits due to a reduction in the interest rate spread between the fixed deposit rate and the saving deposit rate, as well as an increased focus by banks on low-cost deposits in line with credit growth.

While releasing quarterly data on banks, the RBI noted that credit growth has recently outpaced deposit growth, resulting in an increase in the credit-deposit ratio to 73.5% as of June 30 from 70.5% a year ago. Deposits increased by 8.8% in the two weeks ending August 12 compared to loan growth of 15.8% in the same period.

Banks anticipate an improvement in asset quality in the coming year, with more than half expecting gross non-performing asset (NPA) levels to fall below 8% by the end of the calendar year. Despite this, 65% of responding banks expect MSME NPAs to rise in the next six months, while aviation, tourism and hospitality, power, and retail trade are likely to remain asset quality pain points for banks.

“Recovery of the economy from covid-19 shock, higher credit growth, substantial deleveraging of corporate balance sheets, better performance of the industry, healthy capital position, use of recovery agencies, transfer of NPA Accounts to NARCL were cited as the key factors by respondent bankers who reported gross NPAs to be below 8% and in the range of 8-9% over the next six months,” the report said.

Banks are also requesting an increase in priority sector lending limits for agriculture, renewable energy, non-bank financial companies (NBFCs) for on-lending, housing, and education loans. Banks have also suggested that more sectors and sub-sectors be added, such as the entire agri-value chain and areas related to climate sustainability. The RBI recently issued a paper proposing structural changes for banks to make in order to adapt to the financial risks posed by climate change.

Banks have also seen increased spending on digitization and new technologies, which has resulted in higher operating expenses. According to 37% of the banks polled, their average technology expenses as a share of operating expenses for FY22 were above 8%, while another 36% saw such expenses in the range of 5-8%, with most investments in cybersecurity being prioritized. 73% of banks increased their investments in cybersecurity, while cloud-based solutions and new platforms were the other major areas of investment.

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