India Inc is borrowing more, but the big bucks are still missing

Shopping for loans.
Shopping for loans.
Image: Reuters/Amit Dave
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After plummeting to a 60-year low in the last financial year, loan growth for Indian banks is finally reviving.

For the fortnight ended Dec. 22, the Indian banking sector registered double-digit credit growth for the first time since September. 2016, indicating a revival in demand for funds. Continuing that trend, the total loans sanctioned improved by 11% year-on-year to Rs82 lakh crore in the fortnight ended Jan. 05, Reserve Bank of India data show.

For some time now, even as consumers had been borrowing to buy homes, cars, and for personal needs, slowdown-hit companies hadn’t been seeking loans much. In fact, banks themselves were wary of funding corporate expansion plans, since many of the firms had accumulated bad debts and were incapable of servicing more loans.  

Things seem to have turned a corner now.

“(In the) corporate book, we are seeing good traction on working capital since (the) last two quarters and (are) seeing little bit of brown field projects and capex for not new, but existing projects,” Romesh Sobti, managing director and CEO of IndusInd Bank, said after announcing the bank’s third-quarter results earlier this month.

Yet, economists and analysts warn that it may be too early for celebrations.

Real or illusion?

After all, corporate investments are at a 13-year low, suggesting that a lot of these borrowings may still be for smaller amounts to meet working capital needs, and not for capital expenditure, say analysts. “What we are seeing right now is bottoming out of credit growth. So there is a little bit of pick up but not as much because big investments are yet to happen,” said Siddharth Purohit, research analyst at SMC Institutional Equities, a domestic brokerage.

Then there is the base effect. Around this time last year, banks were struggling with an even lower rate of credit offtake. In the second half of financial year 2017, loan growth was severely hit due to the note ban in November 2016. “That’s why the numbers look this good now, but it can’t be taken as a signal that this a full-blown recovery,” Devendra Kumar Pant, chief economist at India Ratings & Research, told Quartz.

Moreover, banks typically see an uptick in loan growth in the third and fourth quarters due to the festival season and on account of increased borrowing by companies.

“A lot of data points, such as auto sales and manufacturing data, show that the economy is improving and there has been a pick up in credit growth,” said Dharmakirti Joshi, chief economist at CRISIL. “However, we are coming out of a sort of disruption and will need some more quarters to ascertain if it’s a full-fledged recovery or not.”

Pant, too, agrees that more data points, such as the index of industrial production (IIP), GDP, consumption patterns, and company results, must be looked into before concluding that demand for corporate credit is back.  “If the momentum in bank credit is maintained, only then can we say that the recovery is real,” Pant said.

The government, on its part,  hopes that its Rs2.11 lakh crore (over $32 billion) bank recapitalisation plan will help state-run lenders clean up their balance sheets and improve their capital positions. The banks can then focus on lending and, in turn, spur economic growth.