Corporate bonds hit banks where it hurts most

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Mumbai | Updated: September 3, 2015 1:10:10 AM

Non-food credit continues to cede ground, growth shrinks to 9.77%

Non-food credit growth as of August 21 remained in single digit at 9.77% y-o-y, according to data by the Reserve Bank of India (RBI).

Outstanding loans in the banking sector stood at Rs 65.63 lakh crore as of August 21 compared with Rs 65.70 lakh crore in the previous fortnight — a fall of Rs6,641 crore.

The single digit credit growth in the banking system can be attributed to the fact that investment cycle is yet to pick up significantly and a considerable amount of borrowing has shifted to the corporate bond and the commercial paper market.

From April to July this year, companies have raised a whopping Rs 1.69 lakh crore through the corporate bond market which is over three times the funds raised through this route in the same period last year.

The non-food credit has actually shrunk 2.93% from the beginning of this fiscal with the outstanding amount seeing a reduction by almost Rs 2 lakh crore.

Gr9

The prime reason for this mass exodus to the corporate bonds is the difference between the bank base rates and corporate bond yields.

The lowest base rate in the banking system stood at 9.70% until HDFC Bank reduced the rate to 9.35%. Contrast this with the AAA-rated public sector unit that can be borrowed in the corporate bond market at a rate of 8.40-8.50% through its long-term bond issue — a difference of at least 120 basis points.

The loan growth driver for banks has mostly been their retail portfolio aided by the SME segment as well.
Sanjay Arya, executive director at United Bank of India, says credit growth has remained  below the double digits for some time and is a reflection of  low level of new investments in the economy.

“Whatever little credit growth is there, it is either for the additional working capital loans, for which the capacities are already created or for enhancements of the already operational projects. Activity is seen in case of financing cost escalation for delayed projects also. New projects are yet to be seen in the economy,” Arya said.

He also said that a credit growth pick-up could be seen in the next one year if investments in defence production and smart cities pick up. “Also, (if) the government plans to take up road projects and infrastructure sector, we could also see credit expansion taking place there as well,” Arya observed.

In contrast to the sluggish credit off-take, the banking system, however, is witnessing a healthy deposit growth at 11.91% on a year-on-year basis. The outstanding deposits in the system stood at Rs89.59 lakh crore as on August 21 compared to Rs 80.05 lakh crore a year ago.

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