The worth of outstanding loans to significant industries shrank for the 11th straight month in July 2021, showed information released by the Reserve Bank of India (RBI). Much of incremental development in bank credit has been led by the retail segment as a trend of deleveraging amongst corporates continues.
Analysts have attributed the shrinkage in credit to significant sector to reduce utilisation of sanctioned limits and reduction in exposures by banks. In a report on Wednesday, ICICI Securities stated beneath-utilisation of limits, a modest demand outlook and rundown of exposure in handful of sectors have resulted in a fall in bank credit to sector.
Last month, State Bank of India (SBI) chairman Dinesh Khara stated sanctioned limits are nevertheless beneath-utilised to the extent of 25%. Similarly, banks with a important presence in corporate lending, such as Bank of Baroda (BoB), have admitted to consciously operating down some low-margin loans.
Sanjiv Chadha, MD & CEO of BoB, told FE in August that an abundance of liquidity has resulted in pricing stress 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 price atmosphere, bank lending to corporates has not seen substantially 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) stated in a note on Wednesday.
There may perhaps be an improvement in corporate lending trends in the months ahead, although. ICICI Securities stated the demand prospects are enhancing. “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 stated, adding Indian financiers, also, have saddled themselves with ample liquidity and capital buffers to tap into the emerging chance.
Pricing trends, also, are most likely to boost, 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 stated, adding that there is a fair bit of activity in sectors like roads, city gas projects and renewable power. Brownfield expansion is also going on, he stated.
A steep decline in bond market place prices till July 2020 had led to a narrowing of the spread amongst bank funding and bond prices, but bond yields look to be trending upwards now, KIE analysts wrote in a report.