ICRA expects system-wide non-food bank credit to expand by 11-12% in FY2017, with private sector banks to continue record faster growth. Considering the realignment of interest rates on small savings schemes that compete with bank deposits, as well as the expected redemption of FCNR (B) deposits that were mobilised in September-November 2013 for a three-year tenure, ICRA expects bank deposits to expand by 10-11% in FY2017. Bank deposits and non-food credit rose by a modest 9.2% and 10.9%, respectively, between March 20, 2015 and March 18, 2016.
Karthik Srinivasan, Senior Vice President and CoHead-Financial Sector Ratings, ICRA Limited, said “Bank deposit and credit growth are expected to record a mild uptick in FY2017, printing in the low double-digits.”
“The extent of pickup in credit growth will largely be dependent upon the magnitude of off-take in credit-intensive sectors as well as easing of supply-side constraints, specifically for Public Sector Banks pertaining to capital requirements and for addressing weak asset quality indicators”, he added
While interest rates in the capital markets were softer than banks’ base rates during FY2016, the implementation of the marginal cost of funds based lending rate (MCLR) from April 1, 2016 could improve banks’ competitive position and boost bank credit growth to an extent. However, issuance of UDAY Bonds would continue to exert downward pressure on bank credit growth in FY2017. On balance, ICRA expects bank credit growth to improve marginally to 11-12% in FY2017, with private sector banks likely to post higher growth.
The average 180-day deposit rate remained stable during Q4 FY2016, and ended the quarter at 7.25% as on March 31, 2016. The Government of India’s (GoI’s) move to align rates on small savings schemes closer to market rates from April 1, 2016 has resulted in a reduction in the rates on the latter by 60-130 bps. Considering this step, as well as the expected redemption of FCNR (B) deposits that were mobilised in September-November 2013 for a three-year tenure, ICRA expects deposit growth to be limited to 10-11% in FY2017.
As compared to the y-o-y growth of 29.4% recorded in April 2015-February 2016, ICRA expects FDI inflows to register an annual growth of 20-25% during FY2017. In particular, several foreign Joint Venture (JV) partners have announced that they would increase their stake in their respective insurance JVs after the easing of FDI norms in H2FY2016, which ICRA expects would generate a surge in FDI inflows into this sector in the next couple of quarters.
ICRA expects the magnitude of incremental FII inflows in the equity segment to largely be guided by the improvement in corporate earnings which, in turn, would take a cue from the evolving monsoon dynamics and the strength of resurgence in rural demand. FII inflows in the debt segment would rise after the scheduled increase in limits in the Government-securities (G-Sec) segment (to Rs. 2.14 trillion from Rs. 1.87 trillion in July 2016) and the relatively more lucrative yields when compared to other Emerging Markets, in ICRA’s view.
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