Credit to industry hits 8-year high as corporations opt for bank funding

Credit growth in the industries segment hit an eight-year high as Indian corporates look to come out of their deleveraging phase and turn towards banks for their funding requirements given bond yields have moved up sharply as compared to lending rates of banks.

According to the latest Reserve Bank of India (RBI) data, loans to micro, small, medium, and large industries rose to Rs 31.82 trillion as of July-end, up 10.5 per cent year-on-year (YoY). Even on a month-on-month (MoM) basis, it has witnessed a 0.4 per cent growth and on a year-to-date (YTD) basis, it is up almost 1 per cent. Credit to industry constitutes 27.7 per cent of the non-food credit of the banking industry.

Last time, credit to the industries segment grew at such a pace in May 2014, when corporate credit growth clocked over 11 per cent growth.

Loans to micro and small industries grew by 28.3 per cent YoY; medium industries by 36.8 per cent; while it was 5.2 per cent for large industries. According to a report by ICICI Securities, sectoral lending to petroleum, iron and steel, petrochemicals, and mining were the key drivers of industry credit growth. On the other hand, telecommunications, textiles, food, processing, and other infrastructure offset the accretion partially.

“Utilisation of existing sanction limits and re-leveraging in a few sectors led to industry credit breaking out of the range of Rs 28-29 trillion during the past three years. We believe revival in consumer demand, rise in private capex followed by rise in government expenditure can be potential triggers for industry credit growth, and catalyse overall credit growth revival,” it said.

A sharp rise in bond yields has led India Inc to reduce their reliance on capital markets and move towards bank borrowings for funding requirements. “Bond yields have risen faster than marginal cost of funds-based lending rate (MCLR) of banks and this, perhaps, has prompted the industries to move from capital markets to the banking sector for funds. Also, since the federal reserve has started raising rates, the borrowing overseas for Indian corporates has become costlier, as a result, they are now borrowing domestically. Once bond yields stabilise, this trend could change,” said Anil Gupta, VP, financial sector ratings, ICRA.

Corporate credit growth is mirroring the overall credit growth seen in the economy. The RBI’s latest data suggests that bank credit grew 15.3 per cent as of August 12, compared to 6.5 per cent in the year-ago period.

Ashutosh Khajuria, executive director, Federal Bank, said, “The trend itself is suggesting that the overall credit growth is more than 15 per cent and lending to micro, small and medium industries is particularly healthy. Banks are well capitalised, many of the issues surrounding the NPA issue have been sorted out and as the economy recovers, they are ready to expand activities in sectors where they are convinced of credibility.”

Banks have also become very competitive as far as rates are concerned to capitalise on any opportunity. HDFC Bank, the country’s largest private-sector lender, lost to competition wholesale loans of about Rs 50,000 crore after it increased interest rates in May, its management said in an analyst call after the bank’s Q1 earnings. Even the country’s largest lender, State Bank of India, had sounded off that some lenders are undercutting rivals and mispricing risks.

Last month, SBI Chairman had mentioned that large portions of loans sanctioned by the SBI to corporates remain unutilised.

“Bank lending, along with the government’s spending and the RBI’s actions, has a multiplier effect on the economy and we will see a concurrent rise in deposits too as the trend continues,” Khajuria said.

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