Mark to Market: Credit growth outpaces deposits

Mark to Market: Credit growth outpaces deposits

Those who are betting on lower interest rates will have to contend with the fact that bank credit is rising and the credit-deposit ratio is getting higher.

Sure, credit always rises as the “busy season" starts off, but the surprise is that bank loans are rising at a faster pace than in 2007. This trend, which had been noticed earlier in this column, has been reinforced by the latest Reserve Bank of India data. Here are the numbers: non-food credit rose by Rs45,964 crore between 17 August and 14 September, compared with an increase of Rs34,331 crore for the same period last year. And since a month’s data does not make a trend, it’s worth noting that credit rose by Rs72,490 crore during the almost two-month period between 20 July and 14 September, compared with an increase of Rs59,800 crore over the same period last year. The slowdown in credit offtake seems to be over.

That holds true even if we take total credit instead of non-food credit. Over the period between 20 July and 14 September, total bank credit went up by Rs45,776 crore, compared with Rs34,192 crore over the same period last year.

What’s more, if we also take into account investment by banks in companies by way of bonds, shares and commercial paper, this figure too has gone up by Rs1,528 crore in the last couple of months, compared with a decline of Rs1,078 crore over the same period last year. Total accommodation provided by banks to the corporate sector is rising rapidly.

At the same time, the percentage of bank credit to deposits has gone up from 70.55% as on 20 July to 71.39% by 14 September. In other words, credit is growing faster than deposits. However, it is very probable that deposit growth will go up sharply in future on account of the deluge of dollars coming into the country. That will add to liquidity and keep interest rates low. With banks awash in this liquidity and with rising credit, any reduction in interest rates by RBI is unlikely.

The stock of Reliance Energy Ltd has gone up 50% in September, rising to a high of Rs1,220 last Friday. That’s after a 44% rise since June. Before that, it had stagnated for three years. What is it about this stock that has suddenly captured the imagination of investors? The proposed Reliance Power IPO has been the latest trigger.

Reliance Energy had raised money through foreign currency convertible bonds three years ago and the stock had run up significantly at that time on hopes that it would soon be able to set up new projects. But a large part of the money raised remained in cash and investments, with the result that “other income" forms a very significant portion of income. This time, however, the projects are finally coming in thick and fast. That’s seen from the company’s plans to augment power capacity from its current 941MW at present to more than 20,000MW by 2015, through backward integration by getting four coal-based methane blocks, by strong order books in its transmission and EPC businesses, by its venturing into infrastructure businesses such as the Mumbai Metro and national highways, and by its plans to develop real estate.

Reliance Power, a subsidiary of the company, will execute the generation projects. And as the projects bear fruit, return on capital will go up. That’s the story moving the stock.

Analysts point out that it will be a long time before the projects become operational —some of them still haven’t obtained financial closure. There are question marks over the profitability of the ultra mega power projects, because of their low tariffs.

Why then has the stock taken off like a rocket? Simply put, investors are betting on “value unlocking" in the company. It’s the old game at work—spin off divisions or subsidiaries, get a strategic investor into them at a price that will establish a new benchmark for valuing them, and then count on analysts to come up with a new sum-of-the-parts valuation. Reliance Energy is being positioned as a play on the India infrastructure story, the strength of which is driving the stock.

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