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Deciphering Bank Credit Growth: Basics



  Aug 29, 2023

Understanding Bank Credit Growth:Fundamentals


The expected credit growth of around 13-13.5% for FY24 among India's scheduled commercial banks (SCBs) isn't just a number. It's all about how different factors work together to shape this prediction:
 
Economic Growth Boosts Credit Demand: As the economy grows, businesses and people need money to invest and spend. This leads to a higher demand for credit from banks. The strong credit growth of 16.2% in Q1FY24 shows how economic growth and credit demand are connected.
 
Business Investment Matters: When businesses plan big projects, they need a lot of money. This drives them to borrow from banks. More business investment leads to more credit demand, which is a key part of the credit growth forecast.
 
PLI Scheme Adds Fuel: A special scheme called Production Linked Incentive (PLI) is also boosting credit demand. This scheme encourages companies to produce more, and they often need money from banks to do that. So, the PLI scheme adds to the credit growth forecast.
 
Retail Borrowing Rises: People also borrow from banks for personal needs like buying a home or paying for education. This is called retail borrowing, and it's growing too. So, the rise in retail borrowing is also contributing to the credit growth outlook.
 
FY23's Effect: But, we have to consider that FY23's growth rate sets a kind of benchmark. So, the expected credit growth for FY24 needs to be seen in light of this.
 
More Borrowing, More Costs: A higher Credit-to-Deposit Ratio (CD Ratio) means banks are competing more to get people's deposits. This can increase their costs, which affects their ability to lend. So, this competition also affects credit growth.
 
Profit Margins and Rules Matter: Net Interest Margin (NIM) is about how much banks earn from loans. Despite a 36 basis point increase in Q1FY24, changing interest rates and competition can affect this. Rules set by regulators also play a role in how much banks can lend.
 
Regulations and the Future: Above everything, rules set by regulators really matter. They balance credit growth with banks' health. Changing rules, along with competition for deposits and rising costs, can change how much profit banks make and how much they can lend.
 
Shaping India's Financial Path: So, the expected credit growth for FY24 isn't just about numbers. It shows how the economy grows, how banks deal with competition and rules, and how different kinds of borrowing add up. This all comes together to shape the future of India's finances and economy.
 

Credit-to-Deposit Ratio (CD Ratio):ABC of It

More Borrowing, More Costs: Understanding Credit-to-Deposit Ratio (CD Ratio)

Think of banks as places that collect money from people (deposits) and lend money to others (credit). The Credit-to-Deposit Ratio (CD Ratio) is like a measuring stick that tells us how much money banks lend compared to how much they have collected.
 
Now, let's break it down:
 
Higher CD Ratio = More Lending: When the CD Ratio is high, it means banks are giving out more loans compared to the money they have in deposits. This could be because many people and businesses are borrowing money for various needs.
 
Competition for Deposits: But here's the thing: banks need deposits to give out loans. Deposits are like the money people save in their accounts. So, when banks want to lend more, they also need to attract more deposits.
 
Competing for Deposits = Costs: Imagine if several banks are trying to get people's deposits. They might offer higher interest rates or better services to attract customers. This competition is good for customers, but for banks, it means they might have to pay more to get people's money (deposits).
 
The Cost Factor: When banks have to pay more to attract deposits, it's like they have to spend more to get the raw material (money) they need for lending. This extra spending on attracting deposits adds to their costs.
 
Balance is Key: Banks need to strike a balance. They want to lend more and make money from interest on loans, but they also need enough deposits to keep things running smoothly. So, a higher CD Ratio can mean more lending, but it can also mean higher costs to attract deposits.
 
Why It Matters: In the context of credit growth outlook, a higher CD Ratio could signal that banks are lending a lot, which is good for the economy. However, it could also mean they're spending more to attract deposits, which might affect their profits and their ability to lend more.
 
In Short: The CD Ratio helps us see how banks balance lending and deposits. A higher ratio shows more lending, but it can also mean higher costs to attract deposits. It's like a balancing act that banks need to manage well to keep the financial engine running smoothly.


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