The recent spurt in banks’ credit growth suggests Indian companies are coming back to the banking fold for their credit needs but the reality could be more nuanced.
As on February 19, credit grew 11.6 per cent, compared with 9.9 per cent at the same time last year. In October last year, credit growth was nine per cent.
The offshore market has turned unfavourable for Indian firms. While the rupee’s weakness before the Budget suggested Indian companies were no longer getting loans at a cheap rate, the weakness in corporate profitability has turned foreign investors away.
On top of that, the spike in corporate bond yields has meant only top-rated companies can raise funds at a rate below banks’ loan rate.
In a research note dated March 9, Nomura economists Sonal Varma and Neha Saraf wrote the recent credit growth uptick could be a signal of long-due higher growth. Or, credit growth could be happening because of higher working capital needs. Surely, there has been some growth in both industry (textiles, metals and infrastructure) and services sectors.
But, the most likely reason, they quoted, “...is substitution away from offshore funding sources (owing to weaker rupee) and away from the money market (due to higher commercial paper rates). Varma and Saraf noted this is a reversal of early 2015, when lower commercial paper rates had led to substitution towards non-banking sources of financing. Commercial paper rates have risen from eight per cent in October 2015 to 9.1 per cent in early March.
Even longer dated paper for AAA-rated firms have firmed up in this period by 30-40 basis points. Hence, it might seem companies are coming back to banks for their loans but bankers and executives of corporate firms say that might not be the case.
“It is true that companies are no longer raising loans from the foreign markets as the foreign investors themselves do not want to lend to emerging markets, including India. Weakness in corporate balance sheets has made borrowing difficult even for big players,” said Prabal Banerjee, chief financial officer of Bajaj Group.
“However, it is not true that Indian corporate sector is coming to banks. There is excess capacity everywhere, which nobody wants to expand further,” Banerjee added.
Bankers largely agree with this assessment. “There have been some pick-up in the road and solar projects but overall, corporate loan demand is not that healthy. Most of the growth is coming from retail loans,” said R K Bansal, executive director at IDBI Bank.
The mood is also likely to persist in the coming year, as bad-debt wary bankers slowly stay inside their protective shell of narrow banking and avoid risks.
As of February 19, credit grew at 11.6 %, compared with 9.9 % at the same time last year
Offshore market has turned unfavourable for Indian firms
Weakness in corporate profitability has also turned foreign investors away
Spike in corporate bond yields has meant only top-rated companies can raise funds at a rate below banks’ loan rate
- Bankers say overall corporate loan demand is not that healthy and most of the growth is coming from retail loans