Aggressive credit growth will limit potential loss bearing capacity of banks: Fitch

Mumbai: Aggressive credit growth may limit the country's banks' ability to absorb possible future losses, Fitch Ratings has warned. A credit growth of more than 13 percent in the banking system will put pressure on core equity tier 1 ratios of banks.

Core equity Tier 1 ratios have declined by half a percentage point in the first six months of the current financial year due to strong credit growth. This ratio was 13.40 percent at the end of last financial year.

Despite the rise in interest rates in the banking system, credit growth is expected to remain robust in the current financial year. The credit growth figure is expected to be around 13 percent in the current financial year i.e. 2022-23 as against 11.50 percent in the financial year 2021-22.

The demand for bank loans is increasing as the economy recovers after the Corona period. As a result of economic growth, the demand for retail and working capital is increasing.

Fitch has estimated the country's economic growth rate for the current financial year at seven percent. Net interest margin of banks will increase due to loan growth.

FY 2024 may also see credit growth at or slightly above 2023 levels. In the current year, Reserve Bank has increased the interest rate by 190 basis points so far.

The agency has also predicted an 11 percent growth in deposits in the current financial year. However, any disturbance in the economy could pose a risk to credit growth projections, Fitch also clarified. Any major slowdown in growth rates could increase the stress on asset-quality.