The value of outstanding loans to major industries fell for the 11th month in a row in July 2021, according to Reserve Bank of India statistics (RBI). As the trend of corporate deleveraging continues, the retail market has led much of the incremental expansion in bank lending.
Analysts link the fall in credit to large industries to banks’ reduced exposures and lower use of sanctioned limits. Under-utilisation of limits, a weak demand forecast, and a rundown of exposure in select industries, according to ICICI Securities, have resulted in a drop in bank lending to the industry.
Dinesh Khara, chairman of the State Bank of India (SBI), remarked last month that sanctioned limits are still underutilized to the tune of 25%. Similarly, banks with a strong presence in corporate lending, such as Bank of Baroda (BoB), have admitted to actively reducing the amount of low-margin loans they hold.
Availability of liquidity, according to Sanjiv Chadha, MD & CEO of BoB, has resulted in pricing pressure on the business 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 stated
Despite the low-interest-rate environment, bank lending to businesses has slowed. The interest rate environment is favourable, but spreads remain elevated, indicating that lenders are still hesitant to relax lending requirements or that borrowers are still hesitant to leverage, according to Kotak Institutional Equities (KIE) in a note released on Wednesday.
However, there is a chance that corporate loan patterns will improve in the next months. According to ICICI Securities, demand prospects are strengthening. After a period of deleveraging over the past few years, we believe India Inc. is now better positioned and confident to embark on the path of re-leveraging, according to the brokerage, which added that Indian financiers, too, have saddled themselves with ample liquidity and capital buffers to capitalize on the emerging opportunity.
The margin between bank funding and bond rates had narrowed due to a strong decrease in bond market rates until July 2020, but bond yields currently appear to be going upwards, according to KIE analysts.
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