India: Shadow banking crisis pushes up bank credit demand – Nomura

India’s bank credit growth picked up to 14.4% y-o-y in mid-October from 12.5% at end-September, pushing the credit-deposit ratio to near a two-and-a-half-year high, notes the research team at Nomura.

Key Quotes

“While there has been an increase in bank credit since the demonetisation shock, we believe the recent pickup mostly reflects ongoing liquidity stress in the shadow banking sector, which has pushed credit demand back into the formal banking system.”

“This pickup in bank credit likely reflects either increased borrowing by non-bank finance companies from banks (given their inability to borrow via the commercial paper route) or a possible credit substitution towards banks in sectors that were heretofore catered by shadow banks.”

“This pickup in bank credit growth is consistent with our view but not enough to compensate for the expected decline in total credit disbursed by shadow banks, as most banks are either liquidity or capital constrained.”

“We see this as a major growth headwind. We believe growth peaked at 8.2% y-o-y in Q2 and will slow to 6.9% by Q1 2019, with risks now skewed to the downside.”