Is there an upswing in bank credit?

ISSUE

SME is the growth driver

Rupa R Nitsure
Chief Economist,
Bank of Baroda During the first half of the current year, there was a serious concern about slower pick-up of bank credit despite signs of economic recovery. Several companies, which had finalised plans for expansion, were either drawing on retained earnings or raising funds from the markets.

They were also taking recourse to cheaper alternatives such as commercial paper and other Mibor-linked products. This was partly the reason why non-food credit in conventional sense was not growing then. But now some early signs of robust credit pick-up have emerged.

The latest data put out by the Reserve Bank of India show that non-food credit off-take has increased by a sizable Rs 64, 000 crore in the last four months. There is also a surge in sanctions and disbursement of funds from the financial institutions.

Total sanctions by IDBI, IFCI, SIDBI and other investment institutions have increased by Rs 27,498 crore in April-October 2003 from Rs 9,143 crore in the same period last year. Disbursements by these institutions have recorded a hefty increase of about 72 per cent.

The main sectors seeking funds from the institutions are cement, iron, steel, automobiles, textiles, chemicals and the power sector.

The non-food bank credit flows are rising in almost all sectors, though a significant amount is going to the infrastructure sector. These are definite signs of investment revival in the economy with expected multiplier effects on the GDP growth.

Healthy credit appetite of Indian companies is indicative of a strong cyclical upturn in the economy.

This is corroborated by the latest capacity utilisation statistics put out by the NCAER, which showed a rise in capacity utilisation from 68 per cent in September 1998 to nearly 90 per cent in September 2003.

Thus, riding high on the demand pick-up, companies in several sectors are drawing fresh plans for expansion after a span of four to five years. In response to this, banks are now reorienting their business strategies towards corporate banking.

Banks tend to concentrate more on "retail lending" if the growth is driven by rising consumer expenditures.

During the second half of 1990s, the major drivers of economic growth were consumption goods, white goods, educational goods and real estate segment.

This enabled the growth of retail financial services provided by banks and influenced capital allocation. Now the "investment demand" has emerged as the major driver of growth. This is encouraging banks to refocus on corporate banking strategies.

Alternative sources of debt financing have emerged over the years for large corporates. Primarily the SME segment is now driving the growth of bank lending.

This has offered an attractive growth channel especially to public sector banks, given their extensive branching network and close long-term relations with business clients.

As the penetration of retail banking in India is still very low, banks will undoubtedly spend increasingly on the development of innovative retail products and services.

But their choice at margin (at least in the short run) between retail versus corporate banking business will be influenced by the actual driver of growth, that is, investment versus consumption spending.

The rise is on the retail side

Prashant Joshi
Head, Retail Banking,
HDFC Bank

Recent Reserve Bank of India (RBI) data suggest that there has been significant growth in bank credit, close to Rs 100, 000 crore over one year period, led entirely by growth in non-food credit.

While the immediate reaction is to attribute this to 7-8 per cent estimated GDP growth rate (led by manufacturing and services sector growth), one needs to delve a little deep.

Yes, non-food credit has grown. But so have investments in government securities. In fact, during the same period, banks have invested about 30 per cent more in government securities.

Evidence that banks are attracting more deposits without seemingly having sufficient avenues to deploy these deposits.

In other words, for most retail investors, bank deposit is still a preferred asset class, notwithstanding recent surge in primary and secondary equity markets and continued growth in mutual fund industry. Now, the more important question: Where is this growth coming from?

Predominantly from the retail segment "" retail finance estimates across all products vary between Rs 80, 000 crore - Rs 100, 000 crore for this year.

Housing loans lead the charge with over Rs 50,000 crore of disbursements during this year. With all round growth in automobiles industry (two-wheelers, passenger cars and commercial vehicles), auto finance is also booming.

Incrementally, retail finance is likely to constitute over 50 per cent of growth in bank credit, if not more.

Notwithstanding some concerns on credit quality, this is just the beginning of growth in retail finance. Over next three years, retail lending will constitute over 30 per cent of net bank credit.

So, where are the corporate borrowers? First, most companies have tightened their belts significantly over last three years and now operate with well-managed working capital levels.

Secondly, even now, no large capacity creation (except government spending on infrastructure) is in sight. Even where companies are borrowing, they are favouring the external commercial borrowing (ECB) route at this point in time.

Also, with favourable equity markets, companies are more likely to access equity. In turn, this means that a well-managed, cost-conscious corporate with improved solvency is in a better position to expand and leverage the balance sheet. We should start seeing pick-up in the corporate borrowing, in next six months or so.

There is one more side to the story "" the much talked about SME (small and medium enterprises) sector. When corporates tightened the belts, their suppliers and dealers had to share some part of this burden. Effectively, some of the borrowing was passed on the supply chain, giving banks an opportunity to lend to supply chain.

Further, explosion in retailing and wholesale trade backed by willingness of banks to take measured risks will further provide impetus to SME lending across manufacturing and services.

Effectively, bank credit will continue to grow across segments. What can be the spoiler? Everything seems to be near perfect. However, if elections were to throw open political uncertainty, we will see the growth engine halting a bit, before the clouds clear. Or else, we can very well say "bank credit-shining".