Demand for credit from corporate India is going up, say top bankers

Demand for credit from corporate India is going up, bankers said, with the capacity utilisation of manufacturing companies touching 76.1 per cent in the July-September quarter (Q2) and many planning to start new projects in the coming months.

Citing investment proposals from the firms in the steel, textiles, cement, oil and gas sectors, bankers said the capex cycle is showing clear signs of traction. 

“Corporate credit is growing... initially in the working capital cycles. We are seeing traction in the steel, cement, textiles, and chemicals sectors. When capacity utilisation breaches the 75 per cent-mark, such as now, the capex cycle starts,” Rajkiran Rai G, managing director (MD) and chief executive officer (CEO) of Union Bank of India, said at the Business Standard Annual Banking Forum on Thursday. 


 

According to the Reserve Bank of India (RBI), capacity utilisation increased from 73.8 per cent in Q1 of this financial year (FY19) to 76.1 per cent in Q2, which was higher than the long-term average of 74.9 per cent. Seasonally adjusted capacity utilisation also increased to 76.4 per cent. 

In its monetary policy statement on December 5, the RBI said indicators suggested industrial activity had been improving in the ongoing quarter (Q3) and growth in core industries has recovered in October on the back of double-digit expansion in coal, cement and electricity. 

The RBI said gross fixed capital formation (GFCF) expanded in double-digits for the third consecutive quarter, driven mainly by the public sector’s thrust on national highways and rural infrastructure, which was also reflected in robust growth in cement production and steel consumption (see chart). 

State Bank of India (SBI) Chairman Rajnish Kumar said the bank was receiving a lot of proposals from the corporate sector and for the first time after three years, the SBI is growing in line with the industry. “I think we are now the lender of the last resort. The 14 per cent year-on-year growth for SBI was a very good number. We are seeing demand from across sectors — government, roads, and renewables. There are proposals from the oil and gas and even non-banking finance companies,” Kumar said. 

Interestingly, most top Indian companies refrained from announcing new projects in the past few years, as capacity utilisation was low and they were looking at acquisition opportunities opened by the Insolvency and Bankruptcy Code.

In the past two years, the Aditya Birla group increased its capacity by taking over cement plants of Jaypee group and Binani Cement and merged Century Textiles cement unit with UltraTech Cement. 

Largest private sector firm Reliance Industries was busy rolling out its telecom network at a cost of over Rs 2.5 trillion. 

The Tata group also increased its steel capacity by acquiring Bhushan Steel and Usha Martin’s steel business. Going forward, Reliance Industries plans to invest in a new refinery, costing $10 billion, and Tata Steel is looking to expand its Kalinganagar capacity at a cost of Rs 235 billion. 

The government’s focus to build new bridges, railway networks and roads helped in rising demand for cement and steel products. “We have seen for some time now an increase on the working capital side and I think it is already starting to follow on the capex side,” said Pramit Jhaveri, CEO of Citi India. This was mainly due to an increase in government and public sector companies spending more in creating rural and road infrastructure, Jhaveri said. 

Romesh Sobti, MD and CEO of Indusind Bank, said new sectors such as renewables have taken a lot of debt in capital expenditure. “It’s not brownfield, it’s greenfield. Power transmission has taken lot of money. Generally, we are seeing a pull beyond working capital. There is capex which is coming back. We are also seeing expansion in the bankable market as a consequence of events like goods and services tax,” Sobti said. 

It’s not only the large corporate houses, but the micro, small and medium enterprises (MSMEs) are also planning to take on more debt, according to Chandra Shekhar Ghosh, MD & CEO of Bandhan Bank. “The MSME segment is growing at the rate of 23 per cent now as new customers are coming in to banks,” he said. In the past five years, there is a 35 per cent growth in new customers in the MSME segment and 25 per cent of them are taking loans. The non-performing assets are also coming down at the same time,” he said.