Banks meet 4% of India Inc's Q1 funding requirement of Rs 2.87 trillion

India Inc raised nearly 27 times more capital from non-bank sources than banks in the first quarter (Q1) of 2018-19 (FY19). 

Companies raised Rs 104 billion as bank credit in Q1FY19, which is 3.62 per cent of their incremental funding requirement of Rs 2.87 trillion. 

Sources other than banks provided Rs 2.76 trillion of finance to the corporate sector in the same period, according to the Reserve Bank of India’s (RBI’s) data on the flow of financial resources to the commercial sector. 

The dominance of non-banking sources is only likely to go up, said experts, as banks struggle with bad loans and other sources of funds become more popular. The issuance of commercial paper subscribed to by entities other than banks dominated the non-bank lending segment, accounting for Rs 1.23 trillion of the mobilised capital. Foreign sources accounted for another Rs 884 billion, including Rs 873 billion of foreign direct investment. 

While figures for Q1 only represent lending during a typically slack quarter for banks, it does seem to point towards a trend.

A similar dominance was seen last year, and the year before that.
 
The growing importance of flows from non-bank sources is also mirrored in the full-year figures for 2017-18, where the split between the two was 50:50 as non-banks contributed Rs 9.31 trillion, compared to Rs 9.16 trillion from banks.
 
In 2016-17, the share of banks in corporate funding needs had plummeted to just about a third of the total, especially as state-owned banks struggled with bad loans.
 
Former RBI deputy governor H R Khan said there was a decline because of issues in the banking sector, especially among public sector banks (PSBs). “The consequent drop in lending by PSBs has not been fully absorbed by the private sector ones,” he said.

At the same time, there have been efforts to reform the debt market segment, which also takes away from the primacy that the banking segment earlier enjoyed by creating other avenues for capital. “This is giving way to non-banking sources,” he added.
 
Prabal Banerjee, group finance director for conglomerate Bajaj Group, pointed out that banks had limited appetite to lend, with 11 banks out of the 21 PSBs under prompt corrective action, a mechanism for central bank intervention to stabilise banks tottering because of issues such as bad loans or breaching capital adequacy norms.
 
“Till the time they are fully capitalised, they will not be very keen to lend any money, particularly to susceptible and vulnerable borrowers,” Banerjee said.

 
He added that corporates were looking to refinance bank loans with bonds. However, many companies have taken long-term project loans. The market has limited ability to refinance such loans through bonds of a similar time period, leading to a demand-supply mismatch.  
 
“Only the very good companies are able to access both bank loans and the bond market - both domestic and overseas - whereas others are getting squeezed out,” he said.  
 
Banks, meanwhile, are also looking elsewhere for growth, especially retail lending. A report from India Ratings noted that the share of resident households (personal loans) in non-food credit has risen from 18.2 per cent in 2011-12 to 25.9 per cent in Q1FY19.
 
“Resident households have emerged a preferred choice for banks after deterioration in the asset quality of banks, owing to significant lending to corporate-turned-non-performing assets,” said the rating agency’s August 2018 note.
 
It added this is not a cause for concern yet. However, increased indebtedness, coupled with a falling savings rate, “has the potential to turn into a major challenge and growth disruptor in the medium-to-long term,” it said.
 
Limited private investment appetite may further queer the pitch. The latest numbers for capacity utilisation peg it around the 75 per cent mark, according to the RBI’s Order Books, Inventories and Capacity Utilisation Survey for March 2018 quarter. This means that around a quarter of companies’ capacities are lying unused, limiting the incentive to invest in fresh capacity which could drive growth.
 
“With limited private investment appetite, corporate borrowing will be minimal with banks except for some acquisition funding for a handful of corporates by a handful of banks,” said Banerjee.