‘Financial institution credit score progress past 18% might result in larger impairments’

Financial institution credit score progress past 18 per cent might result in larger impairments, cautioned the Reserve Financial institution of India.

“Regardless of the divergence in credit score and deposit progress, elevated C-D (credit-deposit) ratio and narrowing credit-GDP hole, credit score progress at 16.1 per cent as on Could 31, 2024 (web of merger of a housing finance firm with a financial institution) stays sustainable and throughout the vary of 16-18 per cent past which it could result in larger impairments,” the central financial institution mentioned within the newest monetary stability report.

The RBI famous that the rising hole between credit score and deposit progress is mirrored in a rising C-D ratio, which has been on the ascent since September 2021 to peak at 78.8 per cent in December 2023 earlier than moderating to 76.8 per cent at end-March 2024.

The C-D ratio of personal sector banks (PVBs) has been notably excessive – over three fourths of the banks with C-D ratios above 75 per cent are PVBs

With credit score rising at a brisk tempo and outpacing nominal GDP progress for seven consecutive quarters, the credit-GDP hole (that’s the distinction between the credit-GDP ratio and its long-term pattern) has sharply narrowed to (-) 2.1 per cent in Q3 (October-December) FY24 from (-) 7.4 per cent Q3FY23.

Credit score and deposit progress divergence

The RBI noticed that there have been episodes of credit score and deposit progress divergence persisting for two to 4 years. A decomposition of seasonally adjusted mixture deposits (deflated by Client Value Index-based inflation) into their pattern and cyclical elements utilizing turning level evaluation reveals that the common length of those cycles is 41 months.

“Furthermore, on this cycle, the merger of a big housing finance firm with a financial institution has exacerbated the credit score and deposit progress divergence.

“As well as, Granger causality reveals that credit score progress precedes deposit progress. Convergence has been largely achieved by a pointy fall in credit score progress,” per RBI’s evaluation.

Within the present cycle, the C-D ratio is near its peak after adjusting for reserve necessities — that’s money reserve ratio (CRR) and statutory liquidity ratio (SLR).