Bank credit growth may recover in second half

Bank credit growth may recover in second half
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First Published: Fri, Oct 23 2009. 09 56 PM IST

Mixed response: The RBI office in New Delhi. Sluggish credit growth will be a key factor for the central bank in deciding on policy direction. Harikrishna Katragadda / Mint
Mixed response: The RBI office in New Delhi. Sluggish credit growth will be a key factor for the central bank in deciding on policy direction. Harikrishna Katragadda / Mint
Updated: Fri, Oct 23 2009. 09 56 PM IST
Mumbai: The Indian banking industry’s slowing loan growth, which has dipped to a 12-year low, may squeeze the central bank’s room for manoeuvre during the quarterly monetary policy review. Still, bankers and companies say there are signs that the trend is changing.
Loan growth until the first week of October slowed to 10.8% from 29.5% a year ago, compared with the central bank’s estimate of 20% expansion for all of fiscal 2010.
Mixed response: The RBI office in New Delhi. Sluggish credit growth will be a key factor for the central bank in deciding on policy direction. Harikrishna Katragadda / Mint
Sluggish credit growth will be a key factor for the Reserve Bank of India (RBI) to consider before taking a call on reversing its accommodative policy. Had loan growth been along RBI’s estimated lines, there would have been a clearer case for a rate hike, say economists. RBI will make its quarterly announcement on 27 October.
In the absence of loan growth, banks’ investment in bonds has grown 40.9% in the past one year until October against a mere 3.2% last year as banks bought debt with no takers for loans.
But bankers say credit will start picking up now. According to M.V. Nair, chairman of the Indian Banks’ Association (IBA), the apex bankers’ lobby, firms are coming back for loans as lenders are offering money at “an affordable rate”.
“We are seeing proposals going up significantly in the past one or two months, which shows that the confidence level of the firms is increasing,” Nair said.
Till recently, borrowers were complaining about banks’ reluctance to lend and their risk aversion.
Graphics: Yogesh Kumar / Mint
“Lenders have sanctioned Rs3,200 crore to double our cement capacity to 24 million tonnes in three years and we will draw money in phases,” said Puneet Dalmia, managing director, Dalmia Cements (Bharat) Ltd, the second largest cement maker in south India.
Binani Cement Ltd too is set to draw money from banks. It plans to build a 2.5-million-tonne cement plant in Gujarat. “The lenders have sanctioned Rs400 crore and we will draw it as soon as we get the limestone licence from the government of Gujarat,” said M.K. Chattopadhaya, chief financial officer of Binani Cement.
When the economy slows, firms traditionally try to reduce costs by cutting inventory and capital expenditure plans and these impact bank loan growth. The cost of borrowing for firms, as a percentage of gross profit, dropped from an average of 35% in the third quarter of fiscal 2009 to 23% in fourth quarter, according to an IBA study.
To be sure, low credit growth does not necessarily mean weakness in industrial activity. Indian firms have started raising money from capital markets and through placing shares with institutional investors. To that extent, their dependence on the banking system has gone down. Analysts say this will continue as long as the going is good in the equity market.
Although sanctions had already been given, companies did not move ahead with new projects between October 2008 and April this year as global economic recovery and its effect on domestic consumption remain uncertain.
Now they have slowly started taking loans for infrastructure projects and fresh applications for utilities, road and power projects are also on the increase.
“Infrastructure projects are spread over years and loans sanctioned to them are not availed in the same year. Existing projects were already availing loans sanctioned to them earlier,” said M.D. Mallya, chairman and managing director of Bank of Baroda. “Now new sanctions are also picking up in this sector.”
Andhra Bank chief R.S. Reddy said his bank’s credit growth has been 32% in the first half and in the second half “it should increase even more.”
“Almost all of the peer public sector bank chairmen I interact with tell me that their loan growth has been at least 18%,” said K.R. Kamath, chief of Kolkata-based Allahabad Bank.
Indeed, almost all public sector banks maintain that they have been steadily lending to the industries while foreign private banks are going slow on expanding their loan books.
Neeraj Swaroop, regional chief executive (India and South Asia), Standard Chartered Bank, is one such.
“We are going slow on unsecured loans, This is our business model,’’ said Swaroop.
Paresh Sukthankar, executive director, HDFC Bank Ltd: “We are seeing a pickup in retail and corporate credit,’’ Sukthankar said.
anup.r@livemint.com
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First Published: Fri, Oct 23 2009. 09 56 PM IST