Alarm bells are ringing in the banking echelons, with the year-on-year credit growth dropping below the double-digit mark to 9.7% for the week ending September 5, 2014?the lowest in the last five years?outpaced by a 13.8% increase in deposits. This reminds us of the financial crisis of 2008 which had dragged credit growth to similar levels (9.6%) in November-December 2009. In FY13 and FY14, credit growth had slowed down to 13-14%, after growing at 22% annually since 2004-05. However, this time, such a low credit growth may actually be a precursor of good things to come!
First, a small statistical artefact. There is a base effect involved here. During the same period last year, many corporates shifted their funding sources from CP/CD market to bank loans after a sudden spike in bond yields which pushed up the demand for credit. The incremental credit in August 2013 was R1,18,790 crore (16.8% year-on-year growth), much higher than R4,996 crore (10.9% year-on-year growth) in August 2014.
Leaving aside such statistical aberration, we believe that low credit growth augurs well for growth. There is now a growing trend of corporates deleveraging and raising equity in the current sluggish business sentiment and this is replacing bank credit. The debt-to-equity ratio of the fresh funds raised has reached the lowest (3.3 times) since FY12. Indian companies, especially those in the infrastructure sector, have started to clean up their balance sheets by reducing some of their crushing debt burdens. It may be noted that the largest six infrastructure companies account for debt equivalent to 8% of total corporate loans.
These apart, stressed companies are best pocketing the turnaround in capital market to meet their capital need via QIPs. In the first five months of FY15 (April to August 2014), funds raised through QIP have grown by 259% over the same period last year and 110.8% higher than the full fiscal FY14. The remaining seven months of the fiscal are expected to see even more fund raising through QIPs as several infrastructure companies and state-run banks are lined up. Interestingly, from March 2014 till September 2014, the price-earnings multiple of Indian firms at incremental level increased from 19x to 24x, appearing to reflect that shareholders are now putting faith behind promoters? action to fund their incremental capex through ploughing back of internal accruals, equity infusion or sale of non-core assets. Independent reports show that in the past one year, Indian companies have sold nearly R600 billion of assets, 64% of this accounted for by the infrastructure industry, followed by oil and gas, real estate and aviation.
Drawdown of existing inventories is also explaining some part of low credit demand. There was substantial inventory drawdown in the first quarter of FY15 and the weak order book prompts companies to operate below full capacity.
Meanwhile, disaggregating the service sector shows that sectors including financing, insurance, real estate and business services (21% to GDP) and community, social and personal services (13% to GDP) are mainly dominated by household ventures and credit to the household sector is limited. These two sectors together contribute nearly 33% to GDP, which is also not a major beneficiary of bank credit (only 27% of total non-food credit; personal loans 19%; commercial real estate 3%; NBFCs 5%; computer software: <1%).
What does this all mean for GDP growth? The quality of growth will be much better as we move on to the next phase of business cycle. One more thing is certain: A higher deleveraging will be good news for banks. However, what could spell even more good news for banks is an improvement in their asset quality.
An improvement in asset quality of banks is indeed a possibility if we look at the following facts. The good thing is that, currently, market sensitivity to RBI liquidity operations is much stronger for successful interest rate stabilisation. In this context, the ?open mouth operations? of RBI have been influencing market expectations, as the apex bank has established its reputation as a fearless crusader against inflation. With the fiscal deficit target for the current fiscal now clearly looking to hit sub-4%, this will have a sobering impact on the yields. Coupled with this, a favourable geo-political verdict from Scotland, and a possibility of a favourable retail inflation outlook may provide RBI some window to open mouth a lower-term structure of interest rates in the immediate future, even without cutting rates. This could be godsend for banks!
(Co-authored with Bibekananda Panda, economist, SBI)
The author is chief economic advisor, SBI. Views are personal