Loan growth may fall to 7-year low in FY13

Slow economic activity, delays in project execution and rising interest rates may result in banks' credit growing at the slowest pace in eight years in the next financial year.

While most bankers see advances growing 16-18 per cent this financial year, they expect credit expansion to slow to less than 16 per cent in 2012-13.

Banks' credit growth has remained over 16 per cent since 2005-06. In the previous financial year, loan growth was 21.38 per cent.

According to bankers, credit growth this financial year is driven by disbursement of loans sanctioned earlier.

With new project launches being delayed, the pipeline for new sanctions is drying up quickly.

On the retail side, high rates and rising inflation are keeping borrowers in a wait-and-watch mode and delaying their purchase decisions.

The festive season did little to boost sentiments and improve retail loan demand.

"A lot depends on the investment climate. Going by the current trend, we expect credit growth at around 16-18 per cent this year. Next year, it would certainly be lower than this," said M V Nair, chairman and managing director, Union Bank of India.

A chief executive of a Mumbai-based private bank said if loan sanctioning did not improve immediately, banks would stare at credit growth of 14

per cent in the next financial year.

The Reserve Bank of India has cut its credit growth projection for this financial year. It now expects bank loans to grow 18 per cent in 2011-12, compared to the earlier forecast of 19 per cent.

Annual credit growth fell to 17.9 per cent in October from 22.2 per cent a year ago, with industrial output growth slowing to a two-year low in September.

"The current growth is coming from past projects. What is clearly happening is the new approval rate is going down because there are no projects, or very few projects, that are coming for financial closure," Chanda Kochhar, managing director and chief executive of ICICI Bank, said in a recent interview with Business Standard.

In July-September, a number of government-owned banks saw their loan books shrink from the levels in March.

For instance, Union Bank of India's advances stood at Rs 1.47 lakh crore as of September 30, compared with Rs 1.53 lakh crore in March.

"Credit growth has seen moderation this financial year, and one cannot be very optimistic about growth in the next financial year. While sanctions are in place, there is no disbursement schedule yet for some projects," said Bhaskar Sen, chairman and managing director, United Bank of India.

Bankers said micro and small enterprises and the farm sector were likely to drive loan demand in the next financial year.