Credit growth dependent on demand rather than supply; corporate may boost growth further

Supply side problems are mostly resolved given most of the other PSUs are out of the PCA framework.

By Santosh Kumar Singh

Credit growth in India over FY14- 21 has slowed down to sub 10%, which was around 18% between FY07-14. This period saw declining GDP growth which is one of the most important levers for credit growth. Other than lower GDP growth rate anaemic credit growth was driven by the following factors;

Demand-side problem

Lower demand for credit from corporates has been the main reason for lower credit growth, whilst the overall credit growth was around 9%, corporate credit during FY14-21 grew at 2% compared to FY07-14 period growth of around 20%. This was driven by massive NPL formation during FY14-21 period in loans to infrastructure and commodity-linked companies. Also, this period has been marked by commodity price deflation and stagnating real estate market, both being negative for credit growth and credit quality. However, we saw retail loans showing more than 15% growth rate driven by home loans and personal loans.

Supply-side problem

As discussed earlier, the supernormal growth of FY10-14 was followed by massive NPL formation. This was driven by bad underwriting, slowdown in economy, policy inaction and a bearish commodity cycle. As a result of this anyone who participated aggressively was impacted severely. Impact was much higher for the PSU banks other than SBI which accounted for almost 40% of the capacity. Most of these banks went into PCA framework. Likes of SBI, ICICI and Axis although not in PCA but were facing severe stress due to these NPLs. ICICI and Axis also saw management changes led by these loans. This meant that baring a few banks most of the capacity was stressed and not very active in the market

Alternative sources of funding

This period also saw vast quantum of investments coming from digital companies, which are generally cash flow negative in the earlier phase due to opex. These companies don’t lend themselves favourably for debt market and hence equity became a big source of funding.
For last couple of years we have seen heightened liquidity in the markets which has meant that market borrowings and equity has been available at a cheaper rate, hence, corporates have been replacing higher cost debt with equity and market borrowings.

However, I think the tide is turning and we may see a revival in the credit growth given;

A) Supply-side problems are mostly resolved given most of the other PSUs are out of the PCA framework. Although I would not expect PSU banks other than SBI to get a lot active, with corporate NPL problems behind for large corporate banks like State Bank of India, ICICI Bank and Axis Bank, a lot of capacity is back in business. These banks are also sitting on good liquidity as well as very strong balance sheets.

B) Hence now growth is totally dependent on demand rather than supply. Given higher liquidity and the corporates still in the deleveraging phase, I would not expect high demand for credit from the corporate segment in the next 6 to 12 months. However, over a 24 month period a) government focus on infrastructure creation would meant that the first phase of credit demand may come from the government and government-owned organisations. b) We have seen working capital requirements falling given very little demand in the market, as we expect the demand for goods and services to come back for the manufacturing sector we may see demand for working capital loans growing at a faster rate c) we have already seen certain sectors in the commodity space returning to profit and this sector may start seeing capacity addition d) real estate has gone through one of the longest bad cycle in last few decades, we are seeing some demand revival in the sector.

D) Retail growth may remain strong given India is still a credit-starved country and hence once we see corporate demand for credit returning this segment may show further promise

(Santosh Kumar Singh, Head of Research, Motilal Oswal Asset Management Company. Views expressed are the author’s own.)