Energy loans and bond dumping push industry credit growth to 12.6%

As bond markets price in central bank rate hikes and quickly readjust to the rising interest rate cycle, corporations are shifting their borrowing to bank lending.

Industrial credit in September rose 12.6% year-on-year, the fastest pace this fiscal year. While the demand for credit from micro, small and medium industries increased by 27% and 36%, respectively, the appetite for credit from large industries increased by around 8%.

According to Krishnan Sitaraman, Senior Director of Crisil Ratings, much of the demand for credit from micro, small and medium enterprises is also driven by the Emergency Line of Credit Guarantee or ECLGS scheme.

Growing demand for credit from industries was also reflected in banks’ second quarter results for fiscal year 2023. HDFC Bank Ltd. saw its loans to businesses and wholesalers increase by 27% year-on-year. ICICI Bank Ltd. and Axis Bank Ltd. also increased their corporate loan portfolios by 23% and 7%, respectively, during the period.

“We’re seeing a lot less corporate bond issuance, which probably means companies are issuing fewer bonds and borrowing more directly from the bank,” said Mihir Vohra, chief investment officer at Max Life Insurance Co. ., to BQ Prime in a recent interview.

Inflation has also played a big role in increasing demand for working capital loans from industries, Vohra said.

Bond prices have risen by an average of 200 basis points over the past six months, Samuel Joseph Jebaraj, deputy managing director of IDBI Bank Ltd., told BQ Prime.

Among industries, the oil, coal and nuclear fuel sector saw a surge in credit demand at 76% year-on-year in September.

“It’s only because of inflation on raw material inputs,” Jebaraj said, referring to the surge in demand for credit from sectors such as fertilizers, oil and coal.

“When the cost of inputs increases, even at the same level of operation and even at the same capacity utilization, the drawdown on working capital will be much higher,” he said.

“We haven’t seen too many bond issuances by fertilizer and oil companies this year so far,” Karthik Srinivasan, head of financial sector ratings group ICRA Ltd., told BQ Prime. .

For oil companies, input prices have increased but the final sale price has not appreciated to the same extent, Sitaraman said.

“A little of [credit] growth also comes from managing the difference between input price growth and realization,” he said.

While industrial credit grew at the fastest pace this fiscal year in September, personal loans were a major growth driver for bank credit. Overall, personal loans were up 19.6% year-on-year in September, with home loans rising 16% and consumer durable loans up 60.7%.

Bank credit to NBFCs also increased by 30% in September. Even though mutual funds have reduced their exposure to NBFC debt, banks seem increasingly eager to lend money to financiers.

Bank credit to NBFCs has increased over the past four years. According to Sitaraman, he further accelerated this exercise due to the resumption of NBFC growth and, to some extent, due to “bond market substitution”, as interest rates on bank loans have not not increased to the same degree as on bonds.

Some banks have also purchased pools of securitized loans from NBFCs, he said. Pools are not reflected in bank credit to NBFCs, but rather appear in overall retail credit growth.

“Banks are using the excess liquidity they currently have to stimulate credit growth,” Srinivasan said.

To keep pushing it, banks will need to make sure they raise enough deposits to meet demand. If they are unable to do so and interest rates begin to stabilize, bond investors could end up returning to the financing industries, he said.

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