Bank credit to industry remains muted, falling 1.7% in the year to date, with companies slashing debt and harnessing existing capacities in a demand environment made uncertain by the pandemic. But bankers expect a revival in corporate loan growth as the economy opens up, making a strong business case for capital expenditure.
Chunky industrial loans, which make up about 30% of non-food credit, have witnessed lukewarm demand so far in 2021, latest central bank data showed, underscoring a trend among companies to conserve cash, deleverage as much as possible, and leave under-utilised the respective loan limits sanctioned by lenders. Retail credit demand has expanded, however, through the period of episodic lockdowns and curbs on mobility.
Both analysts and bankers believe credit demand will now pick up as companies invest for the next cycle of growth. In a report published earlier this month, Japanese investment bank Nomura said growing optimism and abundant liquidity should boost loan demand.
“Banks expect an across-the-board improvement in demand through Q1 2022, with optimism levels the highest for retail loans, followed by manufacturing and services, while infrastructure loan demand lags,” Nomura said. “The simultaneous rise in loan demand and easing of loan supply conditions suggest that credit growth should eventually pick up.”
An uncertain business environment led to muted credit demand from traditionally asset-heavy industries, such as industrial metals, metal products, iron and steel, construction and cement. Instead of adding more debt to their balance sheets, several companies in these sectors sought to deleverage, harnessing cash flows to improve their debt profiles.
Incidentally, better profiles should now encourage many companies to add debt as expansion capital.
“We believe India Inc, after undergoing a phase of deleveraging over the past few years, is now better positioned … (for) re-leveraging. Indian financiers, too, have saddled themselves with ample liquidity or capital buffers to tap the emerging opportunity,” ICICI Securities said in a note. “Recovery in economic activity and the derivative effect of increased investments and corporate/government spending on consumption will sustain the momentum of 15%-plus growth over FY22-FY25.”
To be sure, cheaper rates in the local and overseas bond markets meant that companies looked to those sources for their short- and medium-term funding needs instead of banks.
Bankers believe that as companies embark on large projects, loan demand will rebound. For instance, Bank of Baroda reported a year-on-year fall of 10% in corporate loans as it shed low-yielding advances in the first quarter. But CEO Sanjiv Chadha said he expects loan growth to pick up this year, helping the bank expand its loan book by 7% to 10%. That would include a 5% to 7% expansion in corporate loans.
“Retail loans will still grow faster than corporate loans but we are seeing an uptick in demand from road projects, city gas projects and renewable energy projects, which will help the demand for loans,” Chadha said during the bank’s first-quarter earnings call.
Retail loans have expanded 12% on-year, helped by a low base and paced by demand for homes and vehicles. Credit card spending fell.
Home loans expanded 10% and vehicle loans 11% despite the lockdowns through April and May. But outstanding credit card loans fell 12% year-on-year as consumer sentiment was hit by localised lockdowns.
State Bank of India (SBI), which reported a 2.3% fall in corporate loans, also expects the situation to improve this fiscal. Chairman Dinesh Khara said he expects demand from companies to improve, boosting its loan margins, as both individual and industrial borrowers add more loans.
To be sure, demand from industry is crucial to prop up overall credit growth.
“We believe industry growth will have to emerge as a key driver to boost credit growth in coming years. While it may happen with some lag, revival in consumer demand and rise in government spending can be the potential triggers,” ICICI Securities said.