As per the latest available data, loan growth continues to remain sluggish for the banking system in the April-June period despite the favourable base quarter. Loan growth has remained sluggish at 5-7% YoY since the onset of Covid, compared to ~8-10% before COVID-19.
HDFC Bank, in its business update, reported a healthy 14% YoY growth in advances for 1QFY22, with wholesale loans outperforming the retail segment with 17% YoY growth. IndusInd Bank and Federal Bank reported a modest ~7-8% YoY growth in advances, while Yes Bank reported flat gross advances YoY. CSB Bank reported a strong 24% loan growth for Q1FY22, backed by strong traction in gold loans.
Trends In Credit Demand
Corporate loan growth slid into negative territory since September 2020 as the majority of them have opted to deleverage. Credit to large industries contracted ~2% YoY till 18 June. Loan growth in the service sector has also weakened to ~9% YoY.
On the other hand, MSME loans grew ~14% YoY with support from the MSME credit guarantee scheme (ECLGS). Private banks have been at the forefront in disbursing loans under ECLGS. Retail loan growth moderated to 12.4% YoY from ~15% before the onset of COVID-19. Competition in this segment has risen sharply as PSU banks have started to shift focus towards retail loans in the absence of corporate loan growth.
Banks adopted a cautious approach towards funding the NBFCs. NBFC funding moderated significantly to ~2% YoY through May 2021.
Gold Loan Segment Outshines
Among the various credit segments, housing loan growth now stands improved at ~10% levels, but still well below the 16% seen in FY2020.
Demand for vehicle loans was better than expected and stood at ~12% YoY. Demand for gold loans also grew at a healthy pace of 34% YoY, but lenders have started to become cautious in this segment as gold prices have cooled off sharply. Credit card loan growth has recovered partially to ~12% after dropping to near-zero levels in the same quarter a year ago.
Closing Comments
Loan growth recovery is expected to be slower, with recovery momentum gradually picking up post the second COVID-19 wave. While the retail segment would continue to dominate loan growth, the share of mortgages is likely to increase in retail credit. Consumption-linked credit is also likely to grow faster, while corporate credit growth is expected to remain subdued in the near future.
