Banking & Finance: Is the system credit growth exuberant?

14 Dec 2023 , 11:45 AM

In some of analysts of IIFL Capital Services investor interactions, there have been concerns around significant acceleration in the loan growth of lenders – high-teens for Private banks, and mid-teens for Public banks and NBFCs. However, their holistic assessment of system credit (including banks, NBFCs, HFCs, bonds, offshore borrowings) shows no signs of exuberance on a top-down basis. This view is premised on: (1) India’s system credit of US$2.5 tn is 77% of GDP and is still at the FY18 levels. (2) Credit growth of 12% YoY is below the pre-Covid run-rate and is largely in line with the medium-term nominal GDP growth potential. (3) Credit multiplier ratio, based on both overall credit (0.8x) and banking system loans (1.0x), is ~25% below their LTA. (4) Credit penetration (based on BIS data) is not only significantly lower than that for the emerging markets, but is also below India’s own GFC levels. Analysts of IIFL Capital Services expect credit growth to sustain at low-to-mid-teens (12% YoY in FY23), but expect larger Private lenders to continue chipping away market share from Public banks. Their top picks are Axis, HDFCB and IIB among the banks; and BAF and Chola among the NBFCs. 

Analysing system credit in a holistic manner: 

Analysts of IIFL Capital Services calculate total credit in a holistic manner, which includes banks, NBFCs, HFCs, corporate bond issuances, ECB and commercial paper. Their analysis shows that India’s total credit of US$2.5 tn is 77% of nominal GDP (flat vs FY18 level); growth rate has picked up from the Covid lows, but is still below the pre-2016 levels. With all categories of lenders no longer impaired and end of disintermediation from the capital markets, formal lenders (i.e. banks and NBFCs/HFCs) gained incremental market share in FY23. 

Credit multiplier below the long-term average; expect low-to mid-teens loan growth over FY25-26E: India’s credit multiplier (credit growth to nominal GDP growth) is trending well below its longterm average (LTA), both on total credit basis as well as for banking system loans. Credit multiplier based on total credit is at 0.8x vs LTA of 1.1x, whereas banking system credit multiplier is at 1.0x vs LTA of 1.3x. Banking system credit multiplier was comfortably above the 25yr average of 1.3x, until the Global Financial Crisis (GFC). However, subdued corporate loan growth resulted in this ratio remaining well below its average since FY10. Analysts of IIFL Capital Services expect a pickup in this multiplier to ~1.2x over FY25-26E, thanks to the confluence of favourable supply side (improving data availability with the lenders, best asset quality in the past 15 years, highest-ever capitalisation, end of disintermediation from the capital market) and demand-side factors (rising consumption led loan-demand, shift from unorganised to formal financing and green shoots in capex). This leads us to a 13- 14% loan Cagr estimate over FY25-26E. 

Credit penetration low, relative to other countries: 

India’s credit to private non-financial sector at 90% of GDP has declined by 23pp since the GFC, and is low vis-a-vis 150-200% of GDP for other countries; suggesting absence of credit bubble at the system level. On splitting Private sector credit into household and corporate credit, analysts of IIFL Capital Services observe that India’s household credit-to-GDP of 37% is meaningfully lower vs 50-110% for other countries (46% for emerging markets) and has declined by 6pp since the GFC. Even India’s corporate credit-to-GDP of ~55% is meaningfully lower vs 60- 160% for other countries (102% for emerging markets, mainly driven by China), and has declined by 17pp since the GFC. 

Prefer larger Private lenders over Public banks: 

While India’s credit growth has been secular, the composition of the same has been volatile. Private banks/NBFCs have gained 10pp/5pp market share in the last 15 years, mainly from PSU banks (ex-SBI). With large Private lenders expanding distribution network and diversifying into more segments, analysts of IIFL Capital Services expect them to continue chipping away market share from Public banks. Their top picks are Axis, HDFCB and IIB among the banks, and BAF and Chola among the NBFCs.