Banks hoping credit growth to recover in second half

The loan growth of Indian banking industry has dropped to a 12-year low, which is likely to compress the central bank’s room for maneuver during the quarterly monetary policy review. While bankers and companies on their part are saying still there are indications of trends changing.

First week of October saw slow down in loan growth by 10.8% from 29.5% a year ago as against the central bank’s estimation of 20% expansion for all of fiscal 2010.

In policy review the Reserve Bank of India (RBI) has to first look at the sluggish credit growth before taking a call on reversing its accommodative policy. If the loan growth had been in accordance to the RBI’s estimated lines then clearly there would have been a rate hike, stated economists. RBI will be making its quarterly announcement on 27 October.

Although the loan growth has been slow but banks’ investment in bonds has grown 40.9% in the past one year until October in comparison to a mere 3.2% last year the reason is the banks have bought debt with no takers for loans.

According to bankers now the credit will start picking up. M.V. Nair, chairman of the Indian Banks’ Association (IBA) pointed out the apex bankers will try to influence as firms are coming back for loans as lenders have started offering loan at “an affordable rate”.

Nair stated, “We are seeing proposals going up significantly in the past one or two months, which shows that the confidence level of the firms is increasing”.

Up till now borrowers have been complaining that banks’ have been unwilling to give loan and about their risk aversion.

“Lenders have sanctioned Rs3,200 crore to double our cement capacity to 24 million tonnes in three years and we will draw money in phases,” said Puneet Dalmia, managing director, Dalmia Cements (Bharat) Ltd, the second largest cement maker in south India.

Binani Cement Ltd is also likely to draw money from banks. The company is planning to to build a 2.5-million-tonne cement plant in Gujarat. “The lenders have sanctioned Rs400 crore and we will draw it as soon as we get the limestone licence from the government of Gujarat,” said M.K. Chattopadhaya, chief financial officer of Binani Cement.

Generally when the economy growth is slow, firms usually try to cut down their costs by cutting inventory and capital expenditure plans and this directly impacts bank loan growth. As per IBA study the cost of borrowing for firms, as a percentage of gross profit, has dropped from an average of 35% in the third quarter of fiscal 2009 to 23% in fourth quarter.

Certainly, low credit growth does not essentially points towards the weak industrial activity. On the other hand Indian firms are raising money from capital markets and through introduction of shares with institutional investors, which in turn has reduced their dependency on the banking system. According to analysts this is going to continue as long as the equity market is doing good business.

Though sanctions have been given, but companies did not move ahead with new projects between October 2008 and April this year due to global economic recovery and its effect on domestic consumption remain uncertain.

However they have started taking loans for their infrastructure projects and fresh loan applications for utilities, road and power projects are also increased.

M.D. Mallya, chairman and managing director of Bank of Baroda, “Infrastructure projects are spread over years and loans sanctioned to them are not availed in the same year. Existing projects were already availing loans sanctioned to them earlier”. “Now new sanctions are also picking up in this sector.”

Andhra Bank chief R.S. Reddy told that his bank’s credit growth was 32% in the first half and in the second half “it should increase even more.”

“Almost all of the peer public sector bank chairmen I interact with tell me that their loan growth has been at least 18%,” said K.R. Kamath, chief of Kolkata-based Allahabad Bank.

Now almost all public sector banks claim that lending to the industries is steadily moving while the foreign private banks lending process is slow.

Neeraj Swaroop, regional chief executive (India and South Asia), Standard Chartered Bank, stated his bank is one of them.

“We are going slowly on unsecured loans; this is our business model,’’ said Swaroop.

Paresh Sukthankar, executive director, HDFC Bank Ltd stated, “We are seeing a pickup in retail and corporate credit’’.