India’s banks, hoping for some festive cheer, could get a rude reality check in the coming months on credit growth. Banks have already begun hawking their special festive offers to lure Indians to resume borrowing and make big purchases. The country’s largest lender State Bank of India (SBI) has waived off processing fee on select loans and also promised other offers on its home loans and other products. Rival HDFC Bank too has put up its festival package for potential borrowers.

But the retail borrower may not bite and as a result bank credit growth may languish, analysts said. Those at rating agency Icra Ltd have cut their expectation of loan growth in FY21 to a mere 2-3% from the previous expectation of 6-7%.

There are several factors working against a revival in credit growth. The growth in bank credit in the past few years was mainly led by retail, specifically discretionary spending. The pandemic has made Indians cut back on their spending and lockdowns ensured that they couldn’t spend at all for a few months. This led to a phenomenal drop in retail loan growth. The share of retail loans in incremental disbursals in the first five months of this year was a mere 3.35% from as much as 100% before the pandemic, data from the Reserve Bank of India showed. As such retail loan growth has decelerated to 11% in August from as much as 17% before the pandemic. But what is more worrying is that in August, retail loans shrank by 36,000 crore. Clearly, unlocking the economy hasn’t resulted in Indians increasing their spending. Soumya Kanti Ghosh, chief economist at SBI believes this spells trouble. “Our bottom up approach suggests that deposit and credit growth during the current Unlock 4 regime witnessed large declines, with the maximum decline in savings bank deposits and even bank advances happening in Unlock 4 across all lockdown and unlock phases," he wrote in a note.

The destruction in discretionary spending is stark from these metrics. Moreover, analysts believe that it is futile to expect high single-digit loan growth in a year of deep recession. “There is no demand and banks are struggling on the retail loan front. Most of the growth we see for select lenders is just poaching of customers from other lenders," said a private sector bank official requesting anonymity.

All categories of retail loans have shown a sharp deceleration from pre-pandemic levels. A bright spot has been the recent spurt in loans for purchases of consumer durables. This segment showed a 65% year-on-year growth in August, up from 43% in February. But consumer durables are notorious for being misleading and volatile.

Another bright spot is that corporate loans have shown revival. That said, FY21 would be characterised by moratorium, restructuring and lack of demand for banks.