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Even if India Inc is reluctant to borrow money for financing new projects, credit growth expanded at its fastest pace in nine months in the fortnight ending August 23.
The rising borrowing cost in the commercial paper (CP) market appears to have persuaded companies to approach banks for funding their short-term working capital requirements. This, coupled with strong demand for retail loans, resulted in a 17.1 per cent year-on-year growth in bank credit. The previous occasion when advances’ growth was above 17 per cent was in November 2012.
Following the liquidity tightening measures announced by the central bank on July 15, short-term rates have been hardening. Three-month CP rates have gone up to 12 per cent, much higher than the base rate of banks, at around 10 per cent.
“In the corporate segment, credit growth has been better than expected in recent weeks. Many companies are now coming to banks as the cost of borrowing is now more expensive in the CP market. Also, some of the external commercial borrowing is now getting converted into rupee loans. Hence, despite the slowdown in project finance, corporate credit growth has been higher than expected,” a senior banker said, requesting anonymity.
In the current financial year so far, the pace of credit growth has more than doubled to 5.1 per cent from 2.4 per cent in the corresponding period of 2012-13. However, doubt remains if advances will continue to grow at the same pace during the rest of this year, as large-ticket project finances have dried. Most bankers are betting on retail advances to drive their overall credit growth in 2013-14.
“Corporate houses are still reluctant to start new projects. The demand for project loans continues to remain weak. The credit growth of over 17 per cent is partly because of the base effect. Also, some companies are now borrowing from banks to meet their short-term funding requirement. But the demand for our retail loans, especially housing finance, continues to stay strong,” said Sanjay Arya, executive director of United Bank of India. The growth in consumer loans has been impressive in the past 12 months. The year-on-year growth in housing loans improved to 18.4 per cent in July from 11.4 per cent a year earlier. The pace of growth in loans for consumer durables accelerated to 33.8 per cent from 12 per cent during this period.
According to bankers, the growth in retail advances is likely to be driven by home loan demand in 2013-14, as some of the consumer credit segments are showing signs of slowdown. "Retail credit growth is primarily being driven by housing loan demand. The auto loan segment is not performing well, commercial vehicle finance is de-growing, and the credit card base is too small to make a meaningful impact on overall retail loan growth. The increase in property prices and relatively strong demand for housing in smaller markets is keeping the demand for home loans firm," said Jairam Sridharan, senior vice-president and head of consumer lending and payments at Axis Bank.
