Credit growth in India rose by 9.6 per cent year-on-year to Rs 10.5 lakh crore in fiscal year 2022, according to a report by SBI Ecowrap. This was led by sharp acceleration in retail loans followed by credit in MSMEs and infrastructure, the report added. Going ahead, in FY 2023, credit growth is expected to remain positive, however the current inflation trends could play a ‘spoilsport’ as rate hikes could dampen the credit demand, the report said.

“Due to the various measures taken by the RBI & Government, the signs of recovery became visible in FY22. With this, ASCB’s credit grew by 9.6% in 2021-22, driven by all the major sectors,” according to the report. “It is now evident that an expansion in public sector bank (PSB) credit is crowding in credit growth from private sector banks (PVB). Once this trend turns into a self-fulfilling prophecy, the economy stands to benefit,” it added.

In terms of segments, credit growth jumped in MSMEs and Infrastructure sector to Rs 2.3 lakh crore while for the housing and NBFC sector credit growth was close to Rs 2 lakh crore. Retail loans expanded by a sharp Rs 3.7 lakh crore, driven by a surge in personal loans apart from housing credit and credit to agriculture was at Rs 1.3 lakh crore, according to the SBI Ecowrap report. “It seems that the economy was able to shrug off, to a large extent, the after effects of the pandemic as credit growth was broad-based across all sectors,” the report added.

Having said that, the ongoing crisis in Ukraine, and expected central bank monetary policy tightening could act as a dampener. “Even as the outlook of credit growth looks positive in FY23 also, the current inflation trends could play a spoilsport as rate hikes could have a dampening impact on credit demand just as the economy has been turning round the corner,” the report said.

According to a study done by the Reserve Bank of India, an increase (or decrease) in policy rate by 100 bps (basis points) causes the credit to decline (or increase) by 1.95 per cent with a lag of six quarters. While, a study done by SBI, an increase (or decrease) in monetary policy rate by 100 basis points causes the credit to decline (or increase) by less than 1 per cent.

“However, we believe, a constellation of factors like significant weakening of growth prospects from China could act as favorable conduits of a not so aggressive pace of rate hikes by central banks around the world, including RBI. Oil is likely to correct below $100, with even sub-$90 looking a possibility. The 10 year domestic yield has already retreated sharply and could head sub-7 per cent (6.85-6.9 per cent might be threshold) as real economic activity slows down following the prolonged geopolitical conflict,” SBI Ecowrap said.