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The rise in discount rates has prompted Indian companies to replace their market borrowings with bank loans, leading to accelerated growth in non-food credit, the Reserve Bank of India (RBI) said in a report released on Monday.
"This substitution occurred as money market rates, including discount rates on CPs (commercial papers) firmed up and primary market conditions remained subdued," the banking regulator said in its second quarter review of macroeconomic and monetary developments.
The year-on-year (y-o-y) growth in bank credit was 17.9 per cent as on October 4 compared to 14 per cent a quarter ago. It was also higher than the central bank’s forecast of 15 per cent y-o-y growth in bank advances during the current financial year.
The weighted average discount rate of CPs had increased to 11.53 per cent as on September 15, 2013 from 8.54 per cent at the end of June 2013.
"With rise in discount rates, the appetite for CP issuances has fallen markedly and corporates are substituting funding through the instrument with alternative financing sources, especially bank credit," RBI noted.
The banking regulator warned that lenders need to ensure better credit management practices while extending loans and keep a careful watch on their asset quality owing to the uncertain economic environment. "The Reserve Bank's initiative to collate large common exposures across banks and make available the credit registry data is expected to help mitigate this problem," it added.
The credit growth data suggested there has been build-up in advances to industries and services. The overall industrial credit growth, on a y-o-y basis, was at 17.6 per cent at end-September 2013 with sectors such as basic metals, chemicals, infrastructure, cement, gems and jewellery, wood and food processing reporting above average growth. Consumer loans, especially housing finance, also reported healthy growth.
The weighted average lending rate on the outstanding bank loans increased marginally, by four basis points, on a sequential basis to 12.15 per cent in August 2013. For fresh rupee loans sanctioned by banks, it increased sharply by 42 basis points. The modal base rate (minimum lending rate for banks), however, remained unchanged at 10.25 per cent during the second quarter.
"This substitution occurred as money market rates, including discount rates on CPs (commercial papers) firmed up and primary market conditions remained subdued," the banking regulator said in its second quarter review of macroeconomic and monetary developments.
The year-on-year (y-o-y) growth in bank credit was 17.9 per cent as on October 4 compared to 14 per cent a quarter ago. It was also higher than the central bank’s forecast of 15 per cent y-o-y growth in bank advances during the current financial year.
The weighted average discount rate of CPs had increased to 11.53 per cent as on September 15, 2013 from 8.54 per cent at the end of June 2013.
"With rise in discount rates, the appetite for CP issuances has fallen markedly and corporates are substituting funding through the instrument with alternative financing sources, especially bank credit," RBI noted.
The banking regulator warned that lenders need to ensure better credit management practices while extending loans and keep a careful watch on their asset quality owing to the uncertain economic environment. "The Reserve Bank's initiative to collate large common exposures across banks and make available the credit registry data is expected to help mitigate this problem," it added.
The credit growth data suggested there has been build-up in advances to industries and services. The overall industrial credit growth, on a y-o-y basis, was at 17.6 per cent at end-September 2013 with sectors such as basic metals, chemicals, infrastructure, cement, gems and jewellery, wood and food processing reporting above average growth. Consumer loans, especially housing finance, also reported healthy growth.
The weighted average lending rate on the outstanding bank loans increased marginally, by four basis points, on a sequential basis to 12.15 per cent in August 2013. For fresh rupee loans sanctioned by banks, it increased sharply by 42 basis points. The modal base rate (minimum lending rate for banks), however, remained unchanged at 10.25 per cent during the second quarter.
