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Mint
5 days ago
- Business
- Mint
Is credit demand really slowing? RBI's liquidity push tells a different story
Lately, market watchers have voiced concern over tepid bank credit growth and its implications for the broader economy. With liquidity flush in the system, many have argued for further rate cuts to stimulate credit offtake. It seems some commentators are channelling the spirit of the iconic 1990s ad: Yeh dil maange more. Despite the Reserve Bank of India (RBI) frontloading 100 basis points (bps) worth of rate cuts over the past six months and infusing liquidity of nearly ₹10 trillion, including an impending ₹2.5 trillion via CRR cuts, calls for more policy easing persist. With inflation pressures easing (largely due to food), some believe the central bank still has space to act. From a banker's lens, credit demand has slowed sharply since the start of FY26, with Q1 accretion nearly half of what it was in Q1FY25. But here's the key question: Has credit demand actually fallen? And more importantly, what's the right metric to assess it? Do we measure credit through the borrower's need for funds, or through the volume of credit disbursed by a specific channel, like banks? While bank credit volumes are central for equity analysts tracking banks, should they hold the same primacy in a macroeconomic assessment? When the central bank calibrates system liquidity in line with its monetary policy stance, its primary objective is to ensure adequate credit flow to the productive sectors of the economy. Importantly, the central bank should remain largely agnostic about which channel—banks, non-banking financial companies (NBFCs), and capital markets—provides this credit. The transmission of policy rates and liquidity impulses varies across these channels, influencing the volume of credit each one delivers. Another key factor is each channel's capacity to meet the credit needs of different borrower segments. Let's unpack this. The current monetary policy easing cycle has been unprecedented, with the RBI acting as a veritable 'fountainhead' of liquidity to accelerate transmission. This surge of liquidity has flowed through different channels—banks, NBFCs, and capital markets—at varying speeds. The interest rate transmission has been most rapid in capital markets, followed by banks and then NBFCs. Notably, transmission via External Benchmark Linked Rate (EBLR) lending by banks is immediate. These differences have reshaped the incremental contribution of each channel in meeting credit demand. For instance, following the 100bps cut in the repo rate, commercial paper (CP) rates have declined by 100-150bps, while corporate bond yields have eased by approximately 40-60bps, depending on the tenor. In contrast, for banks, EBLR-linked lending rates, which account for roughly 45-55% of loans (adjusted for fixed-rate loans), have fallen by 100bps. However, MCLR-based rates (~35% share) have only declined by 25-50bps, as banks seek to protect their margins. This divergence is altering the composition of credit flow in the economy. Net corporate bond issuances more than doubled to approximately ₹2 trillion in Q1FY26 compared to the same period last year. CP issuances also rose around 1.5x to ₹60,000 crore. As capital markets see a surge in activity, the sharp slowdown in bank credit, which fell to ₹2.5 trillion in Q1FY26, nearly half of Q1FY25, has been largely offset. On balance, total resources mobilized by the commercial sector through banks and capital markets remained broadly stable year-on-year, at around ₹5 trillion in Q1FY26. On balance, credit demand has not meaningfully declined, despite the drop in bank advances. What has changed is the composition of credit across different funding sources. A borrower's ability to access the lowest-cost funding depends on their credit profile and market presence. Highly rated corporate borrowers, for instance, have ramped up market borrowings and taken advantage of EBLR-linked loans tied to benchmarks like T-Bills, where policy transmission has been swift. In contrast, MSMEs, lacking access to non-bank funding, have become the primary focus for banks. The relatively higher yields on MSME loans have also incentivized banks to lend more to this segment, further supported by the government's credit guarantee scheme. Retail borrowers, meanwhile, have benefited from aggressive competition between banks and NBFCs. However, signs of moderating risk appetite suggest that households are now more cautious and are shying away from additional leverage. To sum up, credit demand remains broadly stable compared to last year, with the RBI's liquidity measures ensuring that the economy's credit needs are met at lower rates. What's evolving is the composition of credit across channels, shaped by the varying pace of policy transmission, which is a healthy development. It may be prudent to allow these liquidity impulses to fully play out and spur economic activity before considering further stimulus. Additional easing could lower rates further but may not materially lift credit demand. Better, then, to wait until the economy truly thirsts for more, before giving in to the 'dil maange more' chorus. The authors are chairman, and chief economic advisor, respectively, at Union Bank of India. Views are personal.
Business Upturn
21-07-2025
- Business
- Business Upturn
HDFC Bank: Buy or sell? Brokerages maintain bullish view, see up to 18% upside on margin stability and long-term loan growth
By News Desk Published on July 21, 2025, 08:37 IST Top brokerages remain bullish on HDFC Bank, reaffirming Buy ratings after the private lender reported a steady Q1FY26 performance. While net interest margins (NIM) compressed more than expected and slippages ticked up marginally, analysts point to strong provisioning, resilient core profitability, and a roadmap for loan growth revival as reasons to stay constructive on the stock. Nomura – Buy | Target: ₹2,190 | Upside: 12% Nomura described the June quarter as a steady operating performance, with some softness on asset quality. However, the brokerage expects loan growth to pick up going forward, and sees the bank delivering RoA of 1.7–1.9% and RoE of 13–14.5% over FY26–28F. It values the core bank at 2.3x Jun-27F BVPS, maintaining a confident long-term view. Nuvama – Buy | Target: ₹2,270 | Upside: 16% Nuvama highlighted a sharp 19 basis point QoQ drop in reported NIM, more than expected, but noted that core NIM declined only 11bps, reflecting underlying resilience. HDFC Bank reprices its EBLR (External Benchmark Linked Rate) loans faster than peers, affecting near-term margins. The bank's asset quality remained best-in-class, with higher slippages primarily due to seasonal farm stress. Importantly, HDFC utilised nearly its entire ₹91 billion gain from HDB Financial Services for contingency and floating provisions, recognising just ₹8 billion as net gains—showcasing prudence in capital management. Core NII and PPOP were flat QoQ and up YoY, indicating operational stability. Bernstein – Buy | Target: ₹2,300 | Upside: 18% Bernstein called it a good set of numbers, with headline EPS up 11% YoY. After adjusting for one-offs like the HDB stake sale, floating provisions, and tax credits, EPS growth stood at 7% YoY. Bernstein highlighted the loan-to-deposit ratio (LDR) falling to 95%, which positions the bank well to repair its balance sheet and resume healthy loan growth from FY27E. The brokerage continues to back HDFC Bank's long-term potential. Brokerage Summary: Brokerage Rating Target Price (₹) Upside from CMP (₹1,956) Bernstein Buy 2,300 +18% Nuvama Buy 2,270 +16% Nomura Buy 2,190 +12% Despite near-term margin pressures, brokerages believe HDFC Bank's strong provisioning, capital discipline, and improving loan-to-deposit metrics will support sustainable growth over the next few years. All three firms remain firmly on the buy side, citing a favourable risk-reward at current levels. Disclaimer: The brokerage views expressed are based on publicly available research reports and do not constitute investment advice. Readers should consult a certified financial advisor before making any investment decisions. Ahmedabad Plane Crash News desk at
