Incremental credit flow in Indian economy to moderate to Rs 24.5 trillion in FY2025: ICRA

08 May 2024 Evaluate

ICRA in its latest report has forecasted that the incremental credit flow in the Indian economy from the domestic sources to moderate to Rs 24.5 trillion in FY2025, from the all-time high achieved in FY2024. It expects the non-food bank credit (NFBC) to moderate slightly in FY2025 from the record-high seen in FY2024. However, bond issuances are expected to increase further in FY2025. As the interest rates are likely to remain elevated in developed markets, the domestic debt capital market would remain an attractive source of borrowings for large corporates.

Competitive funding conditions in domestic markets compared to developed markets meant that large corporates tapped more domestic funding sources over the last two years. Strong demand for loans from retail borrowers and non-bank finance companies (NBFCs) drove a significant portion of the incremental flow of credit from banks. This resulted in the highest ever NFBC expansion of Rs. 22.3 trillion in FY2024 far outpacing the incremental NFBC expansion of Rs. 18.2 trillion recorded in FY2023.

The incremental credit flow was also supported by the all-time high corporate bond issuances of Rs 10.2 trillion in FY2024, resulting in the stock of corporate bonds outstanding rising to an estimated Rs 46.0 trillion as on March 31, 2024, from Rs 43.1 trillion as on March 31, 2023. Besides, the stock of commercial papers (CPs) outstanding also rose by Rs 0.4 trillion in FY2024 to Rs 3.9 trillion as on March 31, 2024. Cumulatively, these three sources accounted for Rs 25.4 trillion of incremental credit flow in the domestic market, an all-time high.

The recent regulatory actions on unsecured retail loans, bank funding for NBFCs and tight liquidity in the banking system may constrain the incremental credit growth of banks. However, the yield on Indian Government Bonds (IGBs) is likely to remain range-bound, driven by demand from foreign portfolio flows upon inclusion of IGBs in global indices. This shall improve the competitiveness of funding from debt capital markets vis a vis bank borrowing and would drive up corporate bond issuances.

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