Loan growth showing signs of reversal from cyclical highs, but asset quality to remain healthy

• Loan growth in the Indian banking sector is starting to show signs of reversal from cyclical highs even as lenders remain intent on giving out loans.
  
• The slowdown has been observed across geographies, ticket sizes, and even the nature of loans.
  
• Despite this, analysts maintain that asset quality is expected to remain healthy and that there are no signs of higher-than-normalised leverage in any sector.
  

Loan growth in the Indian banking sector is starting to show signs of reversal from cyclical highs even though lenders are still firm on giving out loans. The slowdown has been observed across geographies, ticket sizes, and even the nature of loans, according to data from the Reserve Bank of India (RBI).

RBI’s latest report on credit in the banking sector underlined that loans grew at 17% year-on-year during Q3, moderating from the high seen in Q2.

Strong loan growth was one of the drivers of a stellar December quarter for Indian banks, and now, analysts at Kotak Institutional Equities believe there is an increasing probability of loan growth slowing down. “Loan growth has either peaked or has started to slow down in most states,” said the Kotak report.

HDFC Bank, India’s largest private sector lender, also reported a similar trend in its Q4 business update – its loan growth in Q4 came in at 16.9% year-on-year, down from the 19.5% growth in Q3, and 23.5% in Q2, establishing a trend that is visible in the wider banking sector too.

On the other hand, its deposits grew at 20.8% YoY in Q4, accelerating from the 19.9% growth seen in Q3.

Intent to lend still present, but macro risks could derail growth momentum

Despite macroeconomic concerns, companies in the financial sector are still firm on their intent to lend. “Our conversations with all segments of lenders carry a similar line of thought wherein the intent to lend is still comfortable,” said a report by Kotak Institutional Equities.

However, the brokerage notes that an economic slowdown could derail the momentum in loan growth. This is already visible across most loan ticket sizes barring the small ticket ones. The share of loans in the range of ₹1 crore to ₹100 crore has consistently declined from 28% in Q3 FY20 to 23% in Q3 FY23.

On the other hand, the share of small ticket loans up to ₹1 crore has increased from 42% in Q3 FY20 to 47% in Q3 FY23.

Further, according to a report by ICICI Securities, vehicle loan growth in February was flat month-on-month after registering an average growth of 2.1% in the preceding 10 months.

Similarly, industry credit, which accounts for 26.4% of the total non-food credit, was flat in February on a month-on-month basis. “We believe industry growth will have to emerge as a key driver to boost credit expansion,” the ICICI Securities report said, adding that a revival in consumer demand and private capital expenditure will be amongst the key drivers for industry credit growth.

Asset quality to remain firm

On a positive note, analysts maintain that despite the macroeconomic headwinds and rising interest rates, asset quality is expected to remain healthy.

“The risk to asset quality is quite limited at this point of the cycle. We do not seem to have any evidence of excessive lending toward a specific sector,” said the analysts at Kotak Institutional Equities.

Asset quality improvements have been one of the drivers of Indian banks’ strong earnings – the state-run State Bank of India reported its highest-ever quarterly profit in Q3. While the dream run of Indian banks could soon be over as deposit rates start catching up to lending rates, analysts don’t see any signs of stress or higher-than-normalised build up in leverage in any sector yet.

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