Even as the GDP growth has moderated to 4.4% in Q1, Indian banks’ loan growth continues to be relatively high at 17%. The credit multiplier (to real GDP) for the economy therefore is now running at 4x compared to its last 10-year average of 2.9x. Factoring in the WPI moderation, the macro slowdown is even more stark. The contrast has been especially stark in the past six months, as the incremental loan growth as a % of GDP growth has moved up to 100% (vs the past 5-year average of 61%).
The recent pick-up in loan growth to 17% in August from 15% in July, can be partly attributed to the tightening in money markets and corporates’ shift away from instruments such as CPs (commercial papers). However, even adjusted for the CP issuances, loan growth is relatively high at 15%. Another potential explanation could be the substitution of foreign currency borrowings with INR debt by corporates, given the sharp depreciation in the currency. However, ECB (external commercial borrowings) data does not corroborate this and even in the month of July, ECB issuance was relatively high at $3.7 bn.
Correlation to IIP & GFCF has broken down: Historically, a key driver for domestic loan demand has been corporate capex, and the corporate segment is the largest component of bank loan books. Therefore, historically loan growth has had strong correlation with the investment cycle and both GFCF (gross fixed capital formation) and IIP (index of industrial production) growth. In the past 12 months though, this correlation appears to have broken down and even as GFCF has dropped to 4% year-on-year and IIP growth has been averaging at -2%, loan growth is still at 15-17%.
The recent RBI publication, which projects investments in large corporate projects to drop to R1.5-1.8 tn from R3.7 tn in FY11. The decline has been across all the sectors.
We still expect corporate loan growth to fall as investments slow further, with project loan approval dropping to R1.9 trn from R3.7 trn in FY11. The fall in new projects pipeline has started to reflect in incremental planned capital expenditure, which declined