Credit growth yet to pick up

Corporate have been raising money via commercial paper instead of tapping the bank lending route

The Reserve Bank of India’ proThe Reserve Bank of India’ projection on credit offtake seems to have missed the mark as it continues to grow in single digits. Contrary to RBI’s expectation this would rise from September-October, bank credit has continued to remain at the same level or has seen further pressure in certain fortnights.

RBI Governor Raghuram Rajan had earlier said there was generally a lag of three to four quarters from when rates are cut to when the effects can be seen in the economy. “We started cutting the rates in January, so I would start seeing the effects of the rate cut only in September-October-November…As loan demand picks up in Q3 (October-December) of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place,” he said in the monetary policy review in August.

However, data from the regulator shows a different picture. Credit in the system increased by 9.7 per cent as on November 13. It grew at 8.9 per cent in the preceding fortnight. In FY15, credit to industry grew at the slowest pace in the past 17 years, at 9.52 per cent. In this financial year, so far, credit growth is up by only 7.6 per cent.

Despite the festival season, credit demand failed to pick up and continued to remain in single digits. “Last year, the festival season was better than this year and because of the base effect the numbers look even paler in comparison. We were not expecting credit to pick up drastically but definitely expected it to be better,” said a senior official at a private bank.

Bankers believe retail (individual) credit continues to grow at a better pace. It is the lack of growth in corporate borrowing that is dragging down the overall number. “The problem lies with the lack of capital expenditure (capex) growth in the corporate sector. We have not seen any major investment happening and most of the loans continue to be for working capital. It will take another two-three quarters for the situation to improve,” said another banker.

Credit growth is also keeping low because companies have been raising money via commercial paper, instead of tapping the bank lending route.

“Credit demand from sectors with high capex needs is likely to be muted because firms are still working through high leverage and low capacity utilisation. Industry and services together accounted for 66 per cent of bank credit in India as of August, followed by retail (individuals) at 20 per cent and agriculture at 13 per cent. Many higher-rated firms have of late been raising funds from the capital markets, where the cost of funds has fallen below banks’ base rates (the minimum bank lending rate to which the majority of loans are linked),” says a report from Standard & Poor’s.

Typically, lenders see better credit growth in the second half of the year and, therefore, the sector has its hopes pinned on the third and fourth quarter of the financial year.

“Lack of firm credit demand and risk aversion are factors behind the relatively low pace of credit growth, although state banks also face constraints from weak capital buffers and balance-sheet stress,” said a report by Fitch Ratings. However, it expects credit growth to be in 12-13 per cent in FY16.