From bonds to banks: Large industry drives credit growth

“This growth is partly reflective of nominal GDP growth. The credit growth is more of a reflection of nominal GDP rather than the real GDP. There is a base effect also. Till the early part of the last year, the corporates were deleveraging and that process is more or less over now. Now we are seeing a build of working capital in the corporate segment,” said Prakash Agarwal, director & head financial institutions, India Ratings and Research.

“One of the major reasons for this higher growth is because of the shift of credit from capital markets to banks as interest rates offered by banks are cheaper,” Agarwal said. Yield on 10-year benchmark bond has risen by 95 basis points to 7.28 per cent now.

Crisil Ratings chief economist DK Joshi said the input costs have risen which means the borrowing requirements rise. “Another reason is that there has been some movement by corporates to banks (for funding needs) from the bond market. Thirdly, the economy is also recovering,” Joshi said.

Despite a significant increase in lending rates of banks, the headline rates continue to be attractive compared to yields charged in the capital markets. The credit outstanding of the industry segment also grew due to inflation-induced higher working capital demand, Care Ratings said. On a year-on-year (y-o-y) basis, non-food bank credit registered a growth of 18.3 per cent in October 2022 as compared with 6.9 per cent a year ago. Medium industries recorded credit growth of 31.0 per cent to Rs 2.21 lakh crore in October 2022 as compared with 35.1 per cent last year, while credit to micro and small industries rose by 20.4 per cent from 14.6 per cent a year ago. The rise in offtake by large industry is an indication that capital expenditure is rising amid an increase in demand in the economy.

According to RBI data, personal loans expanded by 20.2 per cent (y-o-y) in October 2022 (12.6 per cent a year ago), largely driven by housing and vehicle loans. Housing loans jumped by 16.2 per cent to Rs 18.25 lakh crore by October 2022 as against Rs 15.71 lakh crore a year ago. Credit card outstanding also jumped by 28.4 per cent to Rs 1.79 lakh crore, a rise of Rs 60,000 crore in a year. Vehicle loan outstanding rose by 22.1 per cent to Rs 4.61 lakh crore from Rs 3.77 lakh crore a year ago.

The RBI said credit to services sector accelerated to 22.5 per cent (y-o-y) to Rs 33.21 lakh crore, a rise of over Rs six lakh crore, in October 2022 from 2.8 per cent a year ago, primarily due to improved credit offtake to NBFCs, commercial real estate and trade sectors. Credit to agriculture and allied activities rose by 13.6 per cent (y-o-y) in October 2022 from 10.8 per cent a year ago. According to Care Ratings, the credit growth has been on an uptrend, with wholesale and retail contributing to the same. Credit for the services sector accelerated primarily due to a rise in NBFCs and trade segments. Retail credit growth has been strongly led by miniaturisation of credit, housing, and vehicle loans, MSME growth has remained elevated due to ECLGS. Corporate borrowings indicate a shift from the capital market to bank funding as bond yields have prompted companies to optimise their borrowing cost, it said.