Banking sector loan growth moderates amid weak economic activities, asset quality

• June banking sector loan growth slows to 14.7%, from 15.3% in May 
• Fresh loans granted by banking sector during June stood at Rs.95bn
• NPL ratio, which reached a multi-year high of 3.3% in May, stands pat 

The demand for new loans has shown clear signs of moderation in June as economic activities have slowed down amid the banks maintaining an extremely cautious approach to granting fresh facilities as they battle the deteriorating asset quality after a bout of strong growth in their asset portfolios. 

The banking sector new loans and advances growth decelerated to 14.7 percent in June from 15.3 percent in May, according to the data seen by Mirror Business. The fresh loans granted by the banking sector were Rs.95 billion.

The growth in new loans in the banking sector has been coming down from a high of 21.1 percent reached in 2015, after the Central Bank kept the interest rates artificially low through money printing, which sent the rupee reeling and brought the entire economy close to a balance of payment crisis.  

As the monetary policy was tightened since the beginning of 2016, the credit growth gradually decelerated to 17.5 percent and further down to 16.1 percent in 2017. 
After a private credit spurt in March 2018, with Rs.120 billion new loans granted to the private sector alone by banks, the credit growth decelerated in the preceding two months – Rs.22.3 billion in April and Rs.28.8 billion in May. 

The June numbers, which are also likely to be lukewarm, are expected today as the Central Bank releases its monetary policy statement. 

The economists and analysts expect the Central Bank to stay pat as the ability to manoeuvre policy rates is contained from both ends. The Monetary Board is unable to lower the policy rates to stimulate lending and growth when the central banks in the region are hiking rates in response to the United States Federal Reserve’s hawkish stance.

Yesterday, the Reserves Bank of India raised its lending rate by 25 basis points to contain the retail inflation.  

At the same time, the Monetary Board cannot hike the rates as it could further dampen the growth prospects by hurting consumption and investment activities.   
Economists further see it is puzzling as the rates and the direction of the credit have behaved in opposite directions during the last few months. 

The Central Bank in April cut its benchmark lending facility rate by 25 basis points to 8.50 percent to spur economic growth, which decelerated to a 16-year low of 3.3 percent in 2017.

The Central Bank expects to grow the private sector credit by around Rs.650 billion in 2018 with a year-on-year growth of 13-14 percent.  

The interim financial accounts of the banks for 1H18 so far released also point to a deceleration in the growth in loans and marked increase in their non-performing loans. 

Meanwhile, the banking sector non-performing loan ratio, which reached a multi-year high of 3.3 percent in May 2018, stayed at that level even in July.