Non-food credit, accounting for 99.8% of the share of the total credit, recorded a growth of 17.4%, YoY, at Rs 16846879 crore as on 28 June 2024 as against a rise of 19.8% a month ago and 18.2% rise a year ago.

Food credit moved up 21.5% to Rs 33904 crore as on 28 June 2024. The overall credit-deposit ratio declined on sequential basis to 79.3% as on 28 June 2024 from 79.6% a month ago, while jumped from 75.1% in June 2023 with the faster growth in advances.

As per the data on sectoral deployment of bank credit as released by the Reserve Bank of India (RBI), non-food bank credit increased 19.8% in May 2024 over a year ago, showing acceleration in growth compared with 15.5% increase in May 2023. The credit to agriculture accounting for 12.7% of total bank credit, expanded at an improved pace of 21.6% in May 2024 from 16.0% growth in May 2023. Meanwhile, the credit growth to the industry accounting for 22.1% of total bank credit, increased 9.4% in May 2024 compared with 6.0% growth in May 2023. Within the industrial segment, the advances to large industry rose 7.1%, while credit to medium industry moved up 15.5% in May 2024. The credit for the micro and small industry increased 15.5% compared with 9.9% growth in May 2023.

Credit growth to the services sector accounting for 27.9% of total bank credit, has accelerated to 23.2% in May 2024 compared with an increase of 21.3% in May 2023, driven by acceleration in credit growth for commercial real estate at 45.3%, other services 32.3%, professional services 27.8% and wholesale trade (other than food procurement) 18.3%, while credit growth has also improved for transport operators to 23.7%, tourism, hotels and restaurants 14.1%, aviation 46.9% and shipping 5.1%. However, the services credit growth for NBFCs decelerated to 16.0% and retail trade 17.1%, while credit to computer software moved up 5.9% in May 2024.

Personal loans accounting for 32.5% of total bank credit, increased at an accelerated pace of 28.7% in May 2024 as against an increase of 19.1% in May 2023. Among the major segments of personal loans, the credit for housing increased at improved pace of 38.7%, loans against gold jewellery 29.7%, education 24.2%, advances to individuals against share, bonds etc 21.6% and consumer durables 15.0%. However, the credit growth has moderated for other personal loans to 19.3%, advances against fixed deposits 10.1%, vehicle loans 17.9% and credit card outstanding 26.2% in May 2024 from May 2023.

Priority sector loans accounting for 42.8% of total bank credit, increased at an accelerated pace of 21.4% in May 2024 compared with a 11.7% growth in May 2023. Among priority sector loans, the credit growth for micro & small enterprises improved to 19.9% and agriculture & allied activities 22.7%, while credit to housing expanded 22.2% and weaker sections 24.9%.

Credit to the industrial sector accounting for 22.1% of the total banking sector credit increased 10.4% in May 2024 compared with a rise of 6.0% in May 2023.

As per industry-wise classification, the credit growth has accelerated for infrastructure (9.4% from 1.8%), chemicals & chemical products (17.4% from 4.6%), food processing (14.0% from 4.1%) and all engineering (12.2% from 5.2%).

The credit growth has also moved up for textiles (10.6% from 5.3%), other industries (0.8% from -2.0%), vehicles, parts & transport equipment (14.4% from 7.1%), beverage & tobacco (35.1% from 29.1%), construction (10.1% from 8.2%) and rubber, plastic & their products (12.8% from 9.9%).

Further, the credit growth has improved for glass & glassware (57.3% from 34.7%), paper & paper products (10.6% from 5.2%), wood & wood products (21.4% from 21.3%), leather & leather products (6.5% from 2.2%) and gems & jewellery (7.2% from 7.2%), end May 2024 over May 2023.

On the other hand, the credit growth has moderated for petroleum, coal & nuclear fuels (1.9% from 31.0%), mining & quarrying (incl. coal) (0.1% from 17.7%), basic metal & metal product (14.4% from 16.5%) and cement & cement products (10.4% from 12.9%).

Aggregate deposits growth of the scheduled banks decelerated on sequential basis to 11.1% YoY at Rs 21285327 crore as on 28 June 2024, compared with 12.7% growth a month ago and dipped from 15.5% rise a year ago. The time deposits of the banks moved up 11.8% at Rs 18684129 crore, while the demand deposits increased 6.2% to Rs 2601199 crore as on 28 June 2024.

The banks investment in government and other approved securities that qualify for treatment of statutory liquidity ratio increased 8.7% YoY to Rs 6164564 crore as on 28 June 2024, showing deceleration in growth from 10.3% increase a month ago. The banks investment had moved up 16.0% in June 2023. The investment-deposit ratio decelerated on sequential basis to 29.0% as on 28 June 2024 from 29.3% a month ago, while eased from 29.6% in June 2023 with the faster growth in deposits. The investment-deposit ratio is much higher above the Statutory Liquidity Ratio of 18.0%.

Sector expectations

Consolidation of public sector banks: The budget may provide more information on progress of consolidation of public sector banks and a roadmap to reduce the government’s stake in public-sector banks. This would help improve the efficiency of public sector banks.

Progress of Bad Bank: The bad bank - National Asset Reconstruction Company has commenced operations. The further roadmap for the bad bank may be announced in the budget.

Future Reforms: The Budget may signal future changes for stability in the financial regulatory regime and the development of the stressed assets market.

Incentivizing Savings through Bank channel: In an effort to incentivize savings though banking channels, there is a long standing demand to reduce the lock in period for Tax savings Term Deposits need to be reduced to 3 years from the present 5 years.

PSBs Recapitalisation: The banking sector does not have major expectation on infusion of any capital infusion from the government in Union Budget 2024-25. The public sector banks have started to raise capital on their own. The public sector bank has improved financial health on the back of reduction in bad loans. Banks have raised resources from the market and also by selling their non-core assets. The government may announce further measures to facilitate banks to raise capital from market.

Fiscal consolidation: The fiscal deficit has increased in the recent year in the backdrop of pandemic. Interim Union Budget 2024-25 stuck to fiscal consolidation. However, with formation of coalition government at the Center has raised doubt on roadmap for consolidation. Any fiscal slippage may cause spike in bond yields leading to increase in borrowing costs. This would also lead banks to incur mark-to-market losses on investment book. The government control on fiscal deficit would help to keep interest rate rise in check.

Key stocks to watch

State Bank of India, Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, HDFC Bank, Federal Bank

Outlook

The banking industry is considered the backbone of any economy. The banking sector continued to report strong earnings performance supported by a sharp pick-up in loan growth to a decade high level, better margins and dip in provisions. The banking sector has continued to exhibit substantial improvement in the asset quality. Fresh slippages of loans declined sharply, and the level of stressed asset has further moderated. Banks also continued to improve the provision coverage on bad loans, while the credit cost declined sharply to multi-quarter low. The banking is witnessing challenges on deposits mobilization front due to shift of saving to deposits to investments into capital market instruments. Thus, the banking sector would watch for incentives to boost deposit mobilization. The banking sector would watch for incentives for digitalization, operationalisation, roadmap on reduction of government stake in public sector banks and fiscal consolidation in the upcoming Union Budget 2024-25.