Given how fresh sanctions for project finance in FY17 were around 2.5% of loans, down a good 55% from the peak levels, it would appear banks will continue to find it hard to grow their loan books. Indeed, loan exposure to industry has been contracting for several months now, including the period between April and July, and lenders are therefore staring at a very small increase in their businesses. To be sure, the trend does not hold for all banks because many of the private sector banks are able to snag corporate customers, at times by offering a finer rate of interest. However, state-owned banks are struggling to find quality companies to lend to. That should not come as a surprise since a big swathe of companies remains over-leveraged, with several of these vulnerable to becoming insolvent.
While the sanctions in 2016-17 may be higher than they were in 2015-16, the moot point is whether the loans will ultimately be disbursed. Bankers are expected to be far more cautious about lending to projects from now on and far more strict when it comes to equity contribution, collateral or personal guarantees from promoters. Unless promoters are able to furnish adequate equity, banks will desist from supporting a project. For instance, most banks have made it clear they are not interested in backing hybrid road projects because they feel the promoter has very little skin in the game.The upshot of the extreme caution, not unwarranted given how promoters have taken them for a ride, is that more companies and Non-Banking Financial Companies (NBFCs) are tapping the corporate bond markets. Between April and August, the amount raised in this market was Rs 2.73 lakh crore, up 13% over the corresponding period of 2016. To be sure, banks too are participating in the bond markets and are willing to live with a smaller margin if the quality of the paper is good. For their short-term needs, companies prefer to approach the Commercial Paper market these days since they can pick up money at rates lower than those offered by banks. As such, the share of corporate loans in the total portfolio could fall below the levels of 40-45%. The trend will sustain until corporate balance-sheets are less leveraged and companies are confident of making fresh investments. In the near-term, there is likely to be a lot more consolidation leaving industry with less of a loan requirement. In fact, until capacity utilisation—currently estimated at around 75%—goes up and there is greater visibility on the demand outlook, even profitable companies are likely to hold back any expansion plans. In the meanwhile, lenders must busy themselves chasing retail customers. While the share of retail loans has been rising—from just over 18% in March 2014 to around 22% in June 2016—there has been a slight slowdown in the recent months. Anecdotal evidence suggests the slowdown in the housing sector—post RERA—and the general sluggishness in the economy could stymie loan growth to the retail sector, too.