Credit to large industry falls for eleventh month in a row

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September 02, 2021 7:30 AM

Last month, State Bank of India (SBI) chairman Dinesh Khara said sanctioned limits are still under-utilised to the extent of 25%. Similarly, banks with a significant presence in corporate lending, such as Bank of Baroda (BoB), have admitted to consciously running down some low-margin loans.

Analysts have attributed the shrinkage in credit to large industry to lower utilisation of sanctioned limits and reduction in exposures by banks.Analysts have attributed the shrinkage in credit to large industry to lower utilisation of sanctioned limits and reduction in exposures by banks.

The value of outstanding loans to large industries shrank for the 11th straight month in July 2021, showed data released by the Reserve Bank of India (RBI). Much of incremental growth in bank credit has been led by the retail segment as a trend of deleveraging among corporates continues.

Analysts have attributed the shrinkage in credit to large industry to lower utilisation of sanctioned limits and reduction in exposures by banks. In a report on Wednesday, ICICI Securities said under-utilisation of limits, a modest demand outlook and rundown of exposure in few sectors have resulted in a fall in bank credit to industry.

Last month, State Bank of India (SBI) chairman Dinesh Khara said sanctioned limits are still under-utilised to the extent of 25%. Similarly, banks with a significant presence in corporate lending, such as Bank of Baroda (BoB), have admitted to consciously running down some low-margin loans.

Sanjiv Chadha, MD & CEO of BoB, told FE in August that an abundance of liquidity has resulted in pricing pressure on the corporate side. “The only reason that growth was subdued in this quarter (Q1) was that we allowed some cheaply-priced corporate loans to run off because we believe that the liquidity scenario should start changing over the next few months,” he added.

Despite a low-interest rate environment, bank lending to corporates has not seen much traction. “Interest rate environment is quite favourable but spreads are still holding up at elevated levels suggesting that lenders are still reluctant to relax lending standards or borrowers are not comfortable to leverage, as yet,” Kotak Institutional Equities (KIE) said in a note on Wednesday.

There may be an improvement in corporate lending trends in the months ahead, though. ICICI Securities said the demand prospects are improving. “We believe India Inc, after undergoing a phase of deleveraging over the past few years, is now better positioned and confident to anvil on the path of re-leveraging,” the brokerage said, adding Indian financiers, too, have saddled themselves with ample liquidity and capital buffers to tap into the emerging opportunity.

Pricing trends, too, are likely to improve, according to BoB’s Chadha. “There is an opportunity to price corporate loans in a slightly better manner as compared to what was possible in the last 12 months,” he said, adding that there is a fair bit of activity in sectors like roads, city gas projects and renewable energy. Brownfield expansion is also going on, he said.

A steep decline in bond market rates till July 2020 had led to a narrowing of the spread between bank funding and bond rates, but bond yields seem to be trending upwards now, KIE analysts wrote in a report.

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