Banking system’s credit growth in Oct 2024 moderated due to higher base effect, RBI measures on risk weights: CARE Ratings

Higher base effect, RBI measures such as higher risk weights, the proposed liquidity coverage ratio (LCR) norms, and a focus on managing the Credit-Deposit (CD) ratio moderated the banking system’s non-food credit offtake in October 2024, according to CARE Ratings.

The non-food credit offtake in October 2024 slowed to 11.5 per cent year-on-year (y-o-y), down from 20 per cent including the effect of merger of HDFC with HDFC Bank and 15.4 per cent excluding merger in October 2023.

The credit rating agency noted that credit offtake in October 2024 was driven by industry (large and MSMEs), gold loans, and mortgages, partially offset by lower growth in NBFCs and other personal loans.

To moderate in FY25

“After reporting robust growth in FY24, credit offtake is expected to moderate in FY25, driven by temperance in unsecured retail and slower growth in advances to NBFCs. Personal loans are likely to continue outperform industry and service sectors,” said CARE Ratings’ Senior Director Sanjay Agarwal and Associate Director Saurabh Bhalerao.

The slowdown in personal and services loans can be primarily attributed to an increase in risk weights by the RBI on consumer credit, credit cards and NBFCs, along with an increased risk perception of these segments and some increase in the delinquencies, per the agency.

The rating agency officials assessed that medium-term prospects for the banking sector seem promising, with reduced corporate stress and sufficient provision buffer, but ebbing inflation could also reduce working capital demand.

Furthermore, with an enhanced focus on shoring up the deposit base and managing the CD ratio (currently around 80 per cent) and the proposed LCR norms, bank credit offtake could face challenges, and growth is likely to moderate from the agency’s earlier expectations.