Mumbai: Most of India’s large banks have recorded at least 20% growth in credit in the fiscal year to March, signalling economic revival and growing corporate confidence in fresh investments for capacity expansion.
Ahead of the regulator Reserve Bank of India’s (RBI) annual monetary policy to be announced on Tuesday, senior executives of several commercial banks told Mint that even the expected interest rate increases will not immediately dampen credit growth.
In October, credit growth in the Indian banking industry dropped to a 12-year low of 9.5% as borrowers, both individuals and businesses, complained of banks’ reluctance to lend.
There has been a dramatic change since then. As on 26 March, overall credit offtake was around 17%, despite the conservative approach of some private banks and most foreign banks, which are not aggressively pushing loans fearing a deterioration in the quality of assets.
Among public sector banks, credit growth for both Punjab National Bank and Bank of Baroda was 22%, while it was 23% for Bank of India.
Central Bank of India’s credit growth has been even better—23.8%—while State Bank of India, the country’s largest lender, achieved credit growth of 17%.
“The relatively low lending rates, a recovery in industrial activity, higher inflation and a revival in private corporate capex (capital expenditure) will result in a spike up in credit growth to 24-25% year-on-year by August 2010,” said a recent research report by Morgan Stanley India Co. Pvt. Ltd.
Paresh Sukthankar, executive director of HDFC Bank Ltd, India’s second largest private bank by assets, expects 20% credit growth, “driven by the fact that India is expected to see a GDP (gross domestic product) growth of anywhere in the range of 8-8.5%”.
Firms are growing at a faster pace, he said, and they are drawing loans. “As we enter the new (fiscal) year, there is momentum building up. New term loans are being sanctioned and there (is a) higher drawdown of working capital loans as well. Retail credit is also picking up,” Sukthankar added.
Term loans are usually given for one-five years for purchasing new assets, payable in equal instalments over the loan period. Working capital refers to the money available for the day-to-day operations of a firm.
Janak Desai, country head of wholesale banking, ING Vysya Bank, is also seeing positive signs. “The mood remains buoyant and companies are beginning to invest in capacities. Expect broad-based credit expansion over the next 12 months across multiple sectors,” Desai said.
Bankers see strong demand for loans in industries such as cement and steel, and the utilities sector.
India’s industrial output has seen a sharp rebound. The latest “quick estimates” of industrial growth, for February 2010, suggest the Index of Industrial Production grew at a buoyant 15.1% over the same period last year. Typically, credit growth in banks lags industrial production growth by four-six months.
Stronger nominal credit demand also reflects rising inflation. The wholesale price inflation touched a 17-month high of 9.9% in March, spurred by an all-round increase in prices. This has increased pressure on RBI to raise key policy rates in its monetary policy review.
But bankers say as long as there is enough cash in the system, they need not worry about rate hikes crimping credit growth. Banks are parking nearly Rs60,000 crore in excess cash with the central bank daily.
“If RBI raises CRR (cash reserve ratio, or the portion of deposits that commercial banks keep with the central bank) and SLR (statutory liquidity ratio, or banks’ mandatory investment in government bonds), then our cost of funds goes up and we have to pass on the cost to our customers,” said Bank of Maharashtra’s chairman and managing director Allen C. Pereira.
Even if interest rates are raised, credit growth will not be affected, he said.
Bank of Maharashtra achieved 18% credit growth in the last fiscal, and expects 20-22% growth in 2010-11.
HDFC Bank’s Sukthankar said a 50-100 basis points (bps) increase in interest rates is unlikely to effect credit growth. One basis point is one-hundredth of a percentage point.
“However, if rates were to go up by 150 or 200 bps, this could dampen demand for retail loans,” he said.
His bank will outperform the industry, which is expected to see a credit growth of 20%, he added.
Banking analysts are also not expecting an immediate rise in loan rates and slowdown in credit offtake.
“I don’t see interest rates to go up substantially in the next four-five months. A sharp rise in output over the last nine months has begun to take capacity utilization closer to full,” said Hatim Brochwala of Khandwala Securities Ltd. “We believe private corporate capex will accelerate over the next six months. Infrastructure spending will further accelerate.”
Not every banker is bullish on credit offtake. “One has to see if this is sustainable,” said Bipin Kabra, chief financial officer of Dhanalakshmi Bank Ltd. “The growth is not across all the sectors and one will have to wait and watch to see if this growth is driven by the government stimulus.”
His bank has seen 58% credit growth, but on a very small base. The bulk of demand came from small and medium enterprises.