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Indian banks' loan growth to accelerate despite higher interest rates -Fitch

FILE PHOTO: FILE PHOTO: The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai

BENGALURU (Reuters) - Loan growth at Indian banks will accelerate to 13% in this fiscal year despite the RBI raising interest rates, as economic activity picks up after a pandemic led lull, Fitch Ratings said on Monday.

Lending growth for the previous fiscal year stood at 11.5%.

The Reserve Bank of India has raised interest rates by a total 190 basis points since May to fight inflation, which has only recently shown some signs of easing.

India's annual retail inflation eased to a three-month low of 6.77% in October, helped by a slower rise in food prices and a higher base effect.

While full-year growth will show a modest slowdown from the 17% pace seen in the first half, credit demand is expected to stay robust into the next financial year if economic expansion continued, Fitch added.

Demand for credit has rebounded after a pandemic lull, with consumers and businesses stepping up spending as the economy roared back to life

The country's economy likely returned to a more normal 6.2% annual growth rate in July-September after a double-digit expansion in the previous quarter, a Reuters poll showed.

Strong loan growth will, however, put pressure on core equity tier 1 ratios if credit growth exceed expectations, limiting buffers to absorb potential future losses, the ratings agency said.

Deposit growth is seen at 11% this year and the next, slower than loan growth. Increased deposit rates may put some pressure on margins, but lower credit costs should offset pressure on profitability, Fitch said, adding that near-term asset quality risks appeared contained.

"Deposits' large role in banks' funding mix are likely to remain a credit strength for Indian banks, despite some normalisation in household savings after being boosted during the pandemic," the note said.

(Reporting by Chris Thomas in Bengaluru; editing by Nivedita Bhattacharjee)

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