The supply side problems are mostly solved as most of the other PSUs are outside the PCA framework. By Santosh Kumar Singh
Credit growth in India has slowed to less than 10% in FY 2014-21, from around 18% between FY 2007-14. This period saw a decline in GDP growth which is one of the most important levers for credit growth. In addition to lower GDP growth rates, anemic credit growth was driven by the following factors;
demand side problem
Low credit demand from corporates has been the main reason for low credit growth, while overall credit growth was around 9%, corporate credit grew at the rate of 2% during FY 2014-21 as against around 20% in FY07-14 period increased by. This was driven largely by NPL formation during the FY 2014-21 period in loans to infrastructure and commodity-linked companies. In addition, this period has been marked by commodity price deflation and a stagnant real estate market, both of which are negative for credit growth and credit quality. However, we saw retail loans showing a growth rate of over 15% driven by home loans and personal loans.
supply side problem
As discussed earlier, the phenomenal growth of the financial year 2010-14 was followed by the formation of NPLs on a large scale. This was driven by poor underwriting, a slowdown in the economy, policy inaction and a bearish commodity cycle. As a result anyone who participated in the offensive was seriously affected. Impact on other than PSU banks was huge State Bank Of India Which is about 40% of the capacity. Most of these banks moved to the PCA framework. The likes of SBI, ICICI and Axis, though not in the PCA, were facing severe stress due to these NPLs. ICICI and Axis also saw a change in management led by these loans. This meant that except for a few banks most of the capacity was stressed and not very active in the market.
alternative sources of funding
This period saw huge investments from digital companies, which usually have negative cash flows in the first phase due to OPEX. These companies do not lend favorably to the debt market and hence equity has become a major source of funding.
For the past few years we have seen increased liquidity in the markets, which means borrowing and equity from the market is available at a cheaper rate, hence, corporates are replacing high cost debt with equity and market borrowing.
However, I think the tide is turning and we may see a revival in given credit growth;
a) Supply-side problems are mostly solved, as most other PSUs are outside the PCA framework. Though I didn’t expect PSU banks other than SBI to be very active like corporate NPL problems are behind for big corporate banks. state Bank of India, ICICI Bank And axis Bank, a lot of potential is back in business. These banks are sitting on very strong balance sheets along with good liquidity.
b) So now growth is completely dependent on demand rather than supply. Given the high liquidity and the corporates are still in the deleveraging stage, I do not expect high credit demand from the corporate segment in the next 6 to 12 months. However, over a period of 24 months a) the government’s focus on building infrastructure would mean that the first phase of credit demand could come from the government and government-owned organisations. b) We have seen a decline in working capital requirements given very low demand in the market, as we expect demand for goods and services for the manufacturing sector to return, we expect a sharp increase in demand for working capital loans can see c) we have in the commodity space already some sectors have been seen returning in profit and this sector can see capacity addition d) real estate has gone through the longest worst cycle in the last few decades, We are seeing some demand revival in this segment.
d) Retail growth may remain strong, as India is still a debt-hungry country and hence once we look at corporate demand for credit this segment may show further promise
(Santosh Kumar Singh, Head of Research, Motilal Oswal Asset Management Company. Views expressed are those of the author.)
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