Indian banks will get a lift from the government's plan to cut its borrowing in the next fiscal year, which will leave greater availability of credit for the private sector.
Finance Minister Nirmala Sitharaman's interim budget proposals announced Feb. 1 project the government's gross borrowing at 14.130 trillion Indian rupees in the fiscal year beginning April 1, compared with 14.210 trillion rupees in the current fiscal year ending March 31. "Now that the private investments are happening at scale, the lower borrowings by the central government will facilitate larger availability of credit for the private sector," Sitharaman said in a budget speech.
Capital expenditure will increase by 11.1% to 11.110 trillion rupees in the next fiscal year, accounting for 3.4% of GDP. The fiscal deficit in the current year is expected to settle at 5.8%, compared with the 5.9% estimated in the budget presented in February 2023. Sitharaman said the government would aim to reduce the gap between the government's expenditure and income to 5.1% in 2025. After elections that are expected to be held in the April-to-June quarter, the new government will announce a full budget.
The government's promise to scale back on expenses in an election year reflects confidence that private investment will pick up. India remains the fastest growing major economy in the world as Prime Minister Narendra Modi prepares for elections. The Reserve Bank of India expects GDP to grow 7.3% in the fiscal year ending March, up from 7.2% in the previous year, according to a Jan. 18 report.
Bank loans
Bank credit grew 15.8% year over year in December 2023, compared with 15.3% in December 2022, according to Jan. 31 data from the Reserve Bank of India. Personal loan growth slowed to 17.7% in December 2023 from 20.4% in December 2022, due to a moderation in credit growth to housing and vehicles. The central bank stepped in to tamp down on unsecured loans, the fastest growing segment of retail loans, reflecting worries that risk from the segment could spill to other parts of the banking system.
"Lower government borrowing should be positive for the banks as it would ease the pressure on borrowing and [government securities] rates," Anand Dama, an analyst at Emkay Global, told S&P Global Market Intelligence in an email. "This should help banks in terms of better treasury gains and also some release of funding cost pressure."
Margins level off
Indian banks have seen their net interest margins plateau as the central bank increased policy rates and the cost of funds has gone up. Cost of deposits, which refers to the rate of interest banks pay on deposits, has increased. The weighted average interest rate on domestic term deposits rose to 6.49% in December 2023 from 6.34% in November 2023, according to data released by the central bank on Jan. 31.
A part of the pressure on the banks' cost of funds was due to higher borrowing by the government as policymakers sought to stimulate the economy by infrastructure spending after the pandemic-induced slowdown.
"The lowering of government borrowings will have a salutary effect on bond yields, and it will also make more funds available for lending to the private sector," said Dharmakirti Joshi, chief economist at CRISIL, an S&P Global company.
Joshi said private investments have improved due to healthy corporate balance sheets and from government spending on infrastructure, among other factors. "The bank balance sheets, with low nonperforming assets, too are healthy and in a position to provide funds for private investments," Joshi said.
As of Feb. 1, US$1 was equivalent to 82.96 Indian rupees.
