The growth in non-food bank credit rose by 15.07% year-on-year during the fortnight ended December 7 from 14.92% in the previous fortnight. The growth comes off a relative weak base; in 2017 banks were lending cautiously as they were grappling with loan losses and demand from companies was muted. Deposits with the banking system grew 9.66% y-o-y to Rs 118.84 lakh crore as on December 7, compared to deposits amounting to `108.37 lakh crore in the previous year.
The deposit rate growth has been below 10% since over a year from August 4, 2017 owing to the high deposits on account of demonetisation, also impacting loan growth. Again, borrowings had shifted to the money markets — bond and commercial paper markets — in 2016 and 2017 since interest rates in those markets was lower.
With the rate cycle having tuned, bank funds today are turning out to be slightly cheaper for borrowers. According to provisional data released by the Reserve Bank of India, outstanding loans to companies and individuals stood at `92.03 lakh crore on December 7, a tad higher than `91.32 lakh crore on November 23 and `79.98 lakh crore a year ago.
Bank credit has been picking up pace and grew at 15.1% year-on-year in the fortnight ended November 23. On the other hand, deposit growth over the past many months has been growing slowly; in the fortnight to November 23, they grew at 9.4%. As a consequence banks have been raising both deposit rates and loan rates. “The lower deposit growth amid higher credit growth has been a factor contributing to the liquidity constraints in the banking system”, say experts at CARE Ratings.
An upward movement in lending yields, a direct result of MCLR rate hikes over the last four-five months is seen on the RBI’s data for system wide average lending and deposit rates for September and October. MCLR is marginal cost of funds lending rate and banks charge customers a spread on this rate. A string of banks including SBI, HDFC Bank and ICICI Bank have hiked MCLR rates by 5-10 basis points in December. According to a senior SBI executive, “The current market does not necessarily call for an MCLR hike, but since we plan to make deposit rates competitive and MCLR is based on incremental cost of funds, we had to raise it.”
SBI chairman Rajnish Kumar told reporters after the bank’s Q2FY19 results that the lender had seen a credit growth of 11.11% during the quarter. “We have returned to double-digit growth on the domestic front. Our credit growth is in line with the guidance for 10-12% credit growth for the financial year 2018-19,” he added.
Analysts agree that much of the growth in fresh loans is being driven by small-ticket retail loans in the absence of fresh investments by corporates. In a recent note, Kotak Institutional Equities said the medium-term outlook for corporate loan growth remains weak, given the ongoing deleveraging of large corporate borrowers and lack of large-ticket capex.
A large amount of corporate bonds have moved to the money markets in the recent years. In FY19 (April-October) the corporate bond issuances totalled to `2.31 lakh crore, 38% lower than the issuances to the tune of `3.74 lakh crore in the comparable period in FY18. In October `39,014 crore was raised by way of corporate bond issuances, 38% higher than the issuances of `28,372 crore in September. Private placements accounted for nearly 98% share of the issuances (`38,207 crore), while public issuances amounted to `807 crore.
There has been some revival in November when issuances totalled `55,214 crore, up 8.57% year-on year and higher by 73.12% than `31,893 crore mopped up by firms in October. Total amount raised during April-November, `2.94 lakh crore, is 31% lower y-o-y, as per depository data. The spreads on the 10-year AAA-rated corporate bonds have widened for three consecutive months since September. Net issuances in the September quarter were positive at `4,519 crore after negative net issuances of `16,920 crore in the June quarter.