For private banks, it’s still a hazy picture on corp credit
3 min read 02 May 2023, 10:45 PM ISTSome private banks say private capital expenditure is back; others see muted activity
PremiumIndian private lenders have painted contrasting pictures of the state of corporate loan demand and pricing of risk for the March quarter of the previous fiscal year, with some saying private capital expenditure is back, while others see muted activity.
For instance, Axis Bank executives said demand was back, while Kotak Mahindra Bank said there was no hint of enough capacity expansion by private players. Note, the Axis corporate loan book, at ₹2.7 trillion, is thrice the size of Kotak’s ₹70,384 crore, as on 31 March. While Axis Bank’s corporate loan book grew 14% from a year earlier, Kotak’s corporate advances were almost flat, up just 1% from a year ago.
“The pricing environment is quite conducive at this point in time for us to be able to continue to support credit growth," Rajiv Anand, deputy managing director, Axis Bank, told reporters on 27 April. “We are seeing demand both for term loans and working capital, and are seeing demand for private capex."
Though private capex has well and truly started, one could say it should be much stronger than what it is today. Considering that corporate balance sheets have improved in the last two-three years, many corporates that are increasing capacities are not necessarily coming to the banking system to borrow, said Anand. “They are using their internal accruals to support private capex. The fact that capacities are increasing, especially in an environment where overall capacity utilization is now in excess of 75%, I think it is fair to say that private capex will continue into FY24."
At Kotak, the optimism on the corporate sector borrowings is not as robust. According to KVS Manian, whole-time director, Kotak Mahindra Bank, it is still not seeing very strong capacity creation and loan demand arising out of it.
Citing data by the Reserve Bank of India (RBI) on systemic corporate credit growth, Manian said it is in single digits.
Bank loans to industries, including micro, small, medium and large, stood at ₹33.4 trillion in March, up 5.7% from a year ago. It was, in fact, slower than the 7.5% reported in FY22, according to RBI data.
“Overall, corporate credit growth in the system is not very strong as of now. There are pockets where we are beginning to see some investment-led borrowing but still not seeing that happen on a secular basis," Manian had said on 29 April.
That apart, he said the bank is seeing some pressure on pricing in corporate book, and it is balancing between risk and return. “I would say there is significant amount of irrational pricing in market. We have seen BBB entities getting same rate as AA entities," he said.
Meanwhile, experts said banks will find it difficult to raise rates as large corporates may then make a move towards the bond market. Given that they have internal accruals and strong cashflows to support expansion, hike in rates will not go down well, they added. Most banks price corporate loans on marginal cost of funds-based lending rate, or (MCLR), an internal benchmark that tracks deposit rates, among others.
“Banks will be cautious when it comes to hiking their MCLRs. As corporate bond yields have also softened recently, raising MCLR could pose a challenge in terms of their competitive positioning as compared to bonds," said Anil Gupta, senior vice-president and co-group head of financial sector ratings firm Icra Ltd.
Furthermore, deposit rates have peaked and rate hikes are likely to remain limited, thereby improving banks’ ability to hold benchmark rates, he said.
Analysts said private capex will rise in this financial year, as India’s structural demand visibility, supply-side measures, such as growing infrastructure spend and production-linked incentive schemes by the government, as well as healthier corporate and bank balance sheets, will drive capex in the medium term, Fitch Ratings had said in its 28 March report.