Banks’ credit growth is expected to remain slower in the near term as they are cherry picking their credit portfolios with caution, according to CARE Ratings.

The overall credit growth in the banking sector has continued to moderate for the fortnight ending July 31, 2020, the credit rating agency said.

CARE observed that the credit growth continues to be less than half the level during the last two fortnights.

Credit growth was at 5.8 per cent year-on-year (yoy) in the fortnight ended July 17, 2020 and 5.5 per cent yoy in fortnight ended July 31, 2020, compared to last year’s level of 12.2 per cent registered on July 19, 2019 and August 02, 2019 respectively.

The agency said this was due to weak credit demand and increased risk aversion in the banking system.

The slowdown in the economic activities coupled with continuation of lockdown in some regions has resulted in weak credit pick-up, it added.

Referring to the recent lending rate cuts by banks, the agency opined that this will work more effectively when credit growth picks up and economy returns to a semblance of normalcy.

Deposit growth robust

CARE expects liquidity in the banking system to remain in a surplus position, with the growth in bank deposits expected to be higher than the growth in the bank credit offtake.

Deposit growth increased by 11.1 per cent (as of July 31, 2020) compared with preceding fortnight (10.8 per cent) and improved on yoy basis (10.1 per cent yoy).

The deposit growth at 11.1 per cent is higher than that of the last two years, where the deposits registered a growth between 8-10 per cent, the agency said.

CARE underscored that debt mutual funds have witnessed slower growth since the lockdown started.

It emphasised that this is indicative of risk aversion by investors and could support the rise in bank deposits.

Liquidity surplus may come down

Banks have retained lower deposit rates to protect margins and as the banking system continued to remain in liquidity surplus of more than ₹3.83 lakh crore (during the fortnight ended July 31, 2020), the agency said.

However, the liquidity may witness partial moderation on account of higher market borrowings by the government (Central: ₹63,363 crore and State: ₹30,200 crore during the fortnight ended August 14, 2020).