The surge in commodity prices in the wake of the Russia-Ukraine war may have turned out to be a boon for banks in India as lenders are now witnessing higher demand for working capital. The increased cost of raw materials has led to companies utilising their working capital limits and even seeking top-ups, according to bankers FE spoke to.
The credit offtake improved during FY22, with the gradual return of normalcy after two waves of the pandemic and despite a relatively milder third wave. Non-food credit extended by banks grew 9.7% year-on-year (y-o-y) as on March 25, according to data released by the Reserve Bank of India. Growth in credit to industry recovered to 6.5% in February 2022 from 1% a year ago.
Rajneesh Karnatak, executive director, Union Bank of India, said working capital limits which had been lying idle are now getting utilised. “Corporates who have been utilising their limits have also been coming for additional working capital because the cost of production has gone up. The availing has increased by about 10%,” he said. This trend has emerged in the last one or two months as the Covid situation improved and the Russia-Ukraine situation led to price increases, Karnatak said, adding that higher costs have led to better demand across sectors such as steel, textiles, pharmaceuticals, chemicals and thermal power projects.
In February 2022, State Bank of India chairman Dinesh Khara said the unutilised portion in the bank’s working capital loans had fallen to about 43% from 52% in September 2021.
Crude oil prices surged to a 14-year high of $133 per barrel in the first week of March, and prices have been volatile since then, hovering around $110 per barrel. Base metal prices, measured by Bloomberg’s base metal spot index, increased by 25% between September 2021 and March 2022.
“Rising commodity prices are certainly playing a part in the improved credit growth that you’re seeing. Utilisation is getting better and there is also more demand for LCs (letters of credit) by manufacturers,” said a senior banker with a mid-sized private bank.
Credit to large industry shrugged off an extended period of contraction and sub-par growth to grow 0.5% in February 2022, led by engineering, chemicals, food processing, leather, rubber and plastic products. According to the RBI, infrastructure credit, which accounts for 38% of the total industrial credit, grew 11.9% in February 2022, driven by the road and power sectors and the government’s capex push.
In its monetary policy report for April 2022, the RBI said the firming up of global crude oil prices was the main factor that impacted prices of industrial inputs such as naphtha, aviation turbine fuel, bitumen, petroleum coke and furnace oil. “They also contributed to double-digit inflation in high-speed diesel, which in turn drove up farm input price inflation. Other contributory factors comprise fertiliser prices that edged up in sympathy with international prices, and prices of some non-food articles that remained in double digits – raw cotton and oilseeds,” the report said. The price of electricity – a key input in both industrial and farm inputs – also increased sharply during the second half of FY22 in line with the revival in demand.