Bank credit fell sharply in the first half of the financial year, but the overall funds flow to the corporate sector was virtually the same as the corresponding period last year.

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That’s because India Inc preferred to tap other sources of funds — a cheaper option — even though bank funds were available in plenty (the credit-deposit ratio declined to 69.74 from 73.86 in roughly the same period).

According to the latest Reserve Bank of India (RBI) data, resource flow from domestic sources has been marginally higher during the first half, but the fall in bank credit has been steep. Add to that the decline in external commercial borrowing (ECBs) and Foreign Currency Convertible Bonds (FCCBs) flows, and the gap widens to nearly 28 per cent. 

But the RBI data does not include the substantial money that companies mopped up from domestic equity markets. A total of Rs 41,065 crore was mopped up through initial public offers and qualified institutional placement (QIPs) — nearly 20 times the level in the corresponding period last year (Rs 2,059 crore).

What also helped narrow the overall gap to just 1.87 per cent is the five-fold jump in mutual fund investment in corporate paper. Investment by mutual fund in papers other than government securities jumped to nearly Rs 1,02,000 crore during the first half of the current financial year against around Rs 20,000 crore last year.

Neeraj Swaroop, Standard Chartered Regional CEO for India and South Asia, says, “Till six or eight months ago, there were repeated statements on bank credit growing too fast and we maintained that bank credit was the only source of funding left because the global markets had all dried up. Now, it’s the other way around. We were like the last man standing but today there are many other options.”

As a result of changing market conditions, the share of adjusted non-bank food credit in the overall resource flow to the commercial sector has more than halved to 22.42 per cent during the first half from 48.98 per cent a year ago. For April-December 2008-09, when the impact of the global financial crisis was felt the most, the share of non-food credit in overall resources to the commercial sector was close to 60 per cent.

GMR Group CFO Subba Rao offers an explanation: There is a time-lag between loan sanction and actual disbursement. In 2008, banks were conservative on project financing because of the global economic crisis. That is reflected in this year’s disbursement. With the change in the economic situation, banks have started sanctioning and actual disbursement will take place in the next six to nine months. "When financial conditions were bad, capital-hungry industries such as real estate and infrastructure raised funds through equity issues. Now, they can raise four times of that amount as debt,” Rao says.

The overall resource-flow picture is expected to be unchanged for some time because banks are complaining about the lack of demand from companies that have put capital expenditure plans on hold. Many bankers expect year-on-year credit growth up to March to be in the region of 15 per cent against RBI’s projection of 18 per cent.

“Some portion of the demand has also shifted overseas as the markets have eased. You are seeing higher ECB flows and buyer’s credit is strong,” adds Central Bank of India Executive Director Arun Kaul.

So, what has prompted the reversal? Bankers said it’s the abundant liquidity in the domestic and international markets — a fallout of the stimulus packages announced after the collapse of Lehman Brothers in September 2008. In India, easy monetary conditions have meant that since April, banks have parked over Rs 1,00,000 crore on a daily basis through the reverse repo window of RBI to suck out excess liquidity. As a result, call money rates have remained at 3.25 to 3.5 per cent against the high of over 20 per cent after the credit crisis last year.

Though banks might be lending less, they have been parking funds with mutual funds. At the end of October 23, the latest period for which data was available, banks had invested Rs 1,54,222 crore in these instruments against Rs 14,723 crore a year ago.

“Banks and companies are earning anywhere between 3.5 and 4 per cent by parking funds with mutual funds. In turn, mutual funds, which do not have any risk assessment capability, are making 50 to 100 basis points by lending to companies,” said the head of a large fund house. In contrast, banks charge around 7 per cent for loans extended to companies.

The low-cost advantage, which is available via commercial paper and bonds, has prompted companies to tap these routes instead of bank funding.

For instance, the three public sector oil companies, which had queued up outside banks to raise funds last year, have shifted focus to commercial paper this year. Even the best borrowers — such as these companies — cannot hope to get loans for less than 6.5 per cent, which is close to the cost of funds for the best banks in India. In contrast, they can access resources through three-month commercial paper at 3.5 per cent and use the same route to raise funds for 180 days at 4.5 to 4.6 per cent.

So, recently, Indian Oil and Hindustan Petroleum opted for the commercial paper route to raise Rs 5,000 crore and Rs 2,000 crore, respectively. Bharat Petroleum Corporation raised Rs 1,000 crore through debentures.
 

With new business volumes picking up, Life Insurance Corporation of India (LIC), the country’s largest institutional investor, has also significantly stepped up investment in corporate paper and compensated for the absence of players such as Nabard, Sidbi and Exim Bank.

In addition, taking advantage of improved sentiments, companies have tapped the equity markets to raise resources to reduce leverage levels and also pre-pay some of the high-cost debt on their books.

Bharat Banka, MD & CEO, Aditya Birla Private Equity, says companies were strengthening their balance sheet when credit flow dried up. “With equity-linked fund raising, the debt-equity ratio of many companies has come down substantially. Since they are well positioned with the equity portion for their projects, it is time for domestic banks to fill the gap with increased lending,” he says.

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