Rejig between bonds & loans bumps up credit growth

Reserve Bank of India (RBI) governor Shaktikanta Das said on Friday that the growth in bank credit has accelerated to 14% YoY as on July 15.

Rejig between bonds & loans bumps up credit growth
Stripping off the impact of the shift could make loan growth look a tad slower.

A realignment in bank loans and debt market borrowings amid rising bond yields may be bumping up the loan growth figure for the banking system.

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Reserve Bank of India (RBI) governor Shaktikanta Das said on Friday that the growth in bank credit has accelerated to 14% year-on-year (YoY) as on July 15, 2022, from 5.4% a year ago.

However, an analysis of data on credit and issuances of commercial papers (CP) carried out by economists at HDFC Bank shows that CP issuances have fallen 64% YoY to Rs 94,599 crore in July 2022, from Rs 2.66 trillion in the same month one year ago. Similarly, corporate bond issuances in Q1FY23 fell 19% to Rs 77,275 crore from Rs 95,303.5 crore in Q1FY22, according to data from the Securities and Exchange Board of India (Sebi).

Since banks are major investors in CPs and bonds, the drop in market issuances accompanied by a jump in credit growth implies a rejig in corporate borrowing strategies. Stripping off the impact of the shift could make loan growth look a tad slower.

Bankers confirmed the trend. Prashant Kumar, MD & CEO, Yes Bank, told FE that more than the effect of a lower base, rising yields have driven corporate borrowers to bank loans. “Last year, corporates were able to raise very cheap funds overseas or from local markets. Both have become very costly now. So, they have to come back to banks,” Kumar said. The trend of deleveraging balance sheets, which was on for the last two years, has also started to reverse, thus supporting the loan growth, he added.

State Bank of India chairman Dinesh Khara said after the bank’s Q1 results that the utilisation of sanctioned loans and working capital limits has started to improve. “Capacity utilisation in the economy is at about 75%, and we have got a situation where we expect more corporates to be looking at us for availing credit facilities as compared to options available in the past for raising funds from the securities market.”

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In a report dated August 4, analysts at Jefferies said in addition to higher demand for working capital, bank credit is being lifted by contraction in the bond market, where the stock was down 1.5% between March and June, even as it rose 9% YoY.

“Bank credit growth may have peaked here as commodity prices have retraced – metals/oil/wheat down 20-30% from peak, and as yields stabilise, corporate bonds will also make a come-back,” Jefferies said. Banks can still retain 11-12% Y-oY growth, led by festive season demand and industries holding large inventories in the wake of geopolitical uncertainties, the report said.

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