The total outstanding loans to large industries by the
banking sector has shrunk for the 11th straight month in July 2021 as companies continue to deleverage and shift to cheaper options such as
bonds.
Most of the bank credit is driven by the retail and agri segments as sanctioned limits of corporates remain unutilised to the extent of 25%.
The credit to large industries shrank 2.9% in July.
The credit growth in the last two months is being led by is led by MSMEs, agriculture and retail as corporate lending stays tepid.
Lending to MSMEs, agriculture and retail picked up sharply in July this year over previous year’s levels, data on sectoral deployment of bank credit released by the Reserve Bank of India showed.
Credit to agriculture and allied activities expanded 12.4% in July 2021 as compared with 5.4% in last July.
Deleveraging on
Corporates that are flush with cash on account of booking bumper profits are looking to deleverage their bank loans and prepaying them.
HDFC Bank received Rs 30,000 crore in prepayments through the Jue quarter, mainly from companies in the commodities and infrastructure sectors.
In the April-June quarter, AAA or AA-rated companies sought to deleverage as they recorded solid cash balances. Cash flows were robust at commodity companies because of record iron ore or aluminium prices, boosting net profits. Infrastructure companies, too, reported fatter bottom lines due to the government’s extensive highway-building programme.
With demand collapsing during pandemic and uncertainty rising, companies had put a pause on expansion and have focused on becoming debt-free.
PSU loan books shrink
The deleveraging has led to a drop in corporate loan demand for banks, especially PSU ones.
The domestic corporate loans by the State Bank of India fell 2.23 per cent to Rs 7,90,494 crore in the quarter ended June 30, 2021, compared to Rs 8,09,322 crore in the same quarter last year. In the first quarter of FY21, SBI reported 3.41 per cent growth in corporate advances.
Union Bank of India‘s share of industry exposure in domestic advances dropped to 38.12 per cent at Rs 2,40,237 crore from 39.4 per cent at Rs 2,47,986 crore in the same quarter a year ago. Corporate loans dropped 3% at Indian Bank during the last quarter. At PNB, corporate loans fell 0.57 per cent at Rs 3,264,66 crore in June quarter 2021 compared to Rs 3,28,350 crore a year ago.
Up to May, the gross loans to large industries declined by 1.7 per cent year-onyear, according to RBI data.
However, HDFC Bank expanded its corporate loans by over 10% in the April-June quarter to about Rs 3.15 lakh crore.
Shift to bonds
The corporate world focused on deleveraging high-cost loans through fundraising via bond issuances despite interest rates at an all-time low. This has led to muted credit growth for banks.
Corporates raised Rs 2.1 lakh crore in the December quarter and Rs 3.1 lakh crore in the fourth quarter from the corporate bond markets. In contrast, the corresponding year-ago figures were Rs 1.5 lakh crore and Rs 1.9 lakh crore, respectively.
Bonds were mostly raised by top-rated companies at 150-200 basis points below bank loans. Most of the debt was raised by government companies as they have top-rated status.
For AAA-rated corporate bonds, the yield was 6.85 per cent in May 2020, which fell to 5.38 per cent in April 2021 and to 5.16 per cent in May 2021.