Loan growth of banks hit a three-year high in November, boosting early signs of revival in demand after credit offtake had touched multi-year low in the past year.

Bank loans, including procurement credit and loans to individuals, farmers and businesses, rose 9.64 percent year-on-year (YoY) to Rs 79.62 lakh crore as on November 24, 2017, compared to 6.6 percent growth in same period in 2016 and 9.3 percent in 2015, shows the latest provisional Reserve Bank of India (RBI) data.

Non-food bank credit witnessed double-digit growth for the first time in 15 months, rising 10 percent YoY, during the fortnight ended November 24.

However, base effect may have helped in making the current growth numbers look better.

For over two years now, growth in banks' loan portfolio is being driven by retail loans. But since October, the trend in growth in loan to large corporates has turned positive after a contraction for more than a year.

A senior public sector bank official said: "Loan demand is gradually picking up among corporates in select sectors as well as small businesses."

RBI governor Urjit Patel in his monetary policy statement on Wednesday, said: "There has been some pick up in credit growth in recent months... Recapitalisation of public sector banks may help improve credit flows further."

Loan growth had plunged due to mounting non-performing assets (NPAs) in the banking system and a slowdown in the economy, especially after demonetisation. The NPA situation worsened after the RBI, under the leadership of the then Governor Raghuram Rajan, conducted an asset quality review (AQR) in October 2015, which rapidly increased the level of stressed assets on banks' books.

This also led to increased provision requirements towards such loans eroding the capital base of many banks and hence, they went slow on sanctioning new loans.

The central bank has noted that while there has been weakness in some components of the services sector such as real estate, the RBI survey had indicated that the services and infrastructure sectors are expecting an improvement in demand, financial conditions and the overall business situation in Q4. This could have also added to the loan demand during the rest of the fiscal year.

"Latest data on bank credit and adjusted bank credit and total financial resources flow suggest that we are in the uptick on credit growth," Patel said addressing media after the fifth bi-monthly monetary policy announcement.

"Credit is flowing in more than what was the case in October. As economy picks up, demand for credit should go up and there is enough supply to ensure that lack of credit is not in the way of supporting higher growth," he added.

On December 6, the Monetary Policy Committee kept key repo rate unchanged at six percent.

Despite a status quo in interest rates, bankers are expecting the loan demand to pick up in the second half of financial year 2017-18.

B Sriram, Managing Director and Corporate Banking head at State Bank of India last month had said: “A lot of deleveraging (in companies) is taking place. Project pipeline in new projects has dried up and capacity utilisation is still at 70 percent, so there is still time for corporates to look at fresh credit."

SBI Chairman Rajnish Kumar in his post results commentary last month said: “Demand for corporate credit for the next two quarters will remain muted I believe, and the story will continue around consumption (retail)…Credit growth will not be beyond 5-6 percent for the full year."

He added that the bank is “not chasing credit growth but returns”.

It remains to be seen if this growth, supported by base effect, continues to augur well for the banking sector.