The third quarter (Q3) of the current fiscal has witnessed a visible expansion in credit growth across sectors. Sectors, where demand for credit started picking up during the past three months includes non-banking finance companies (NBFCs), telecom, petroleum, chemicals, electronics, gems & jewellery and infrastructure including power and roads, which mostly have big-ticket disbursements, says a research note.
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI) says, "...our recent understanding of market participants, suggest that demand from non-public sector unit (PSU) credit is set to outpace that of PSU credit in the fourth quarter (Q4) of FY21-22. The largesse of such credit will be sectors such as healthcare, commercial real estate, pharmaceuticals, infrastructure, NBFCs, and construction. These are credit sought mostly by mid-rung entities."
Co-lending with NBFCs remains one of the most preferred lending options in the current scenario as it also helps NBFCs churn their capital and offer on-lending at affordable costs, Dr Ghosh added.
Credit growth of all scheduled commercial banks (ASCBs), which had considerably weakened since FY19-20, has picked up significantly and was at 7.3% until 17 December 2021. This is just a tad lower than the pre-pandemic level at 7.5% in December 2019, the report says.
Deposit growth, which was consistently in double digits since the pandemic and was at 12.3% in March 2021 has decelerated to 9.5% in December 2021, lower than the pre-pandemic level at 10%. Interestingly, SBI says that credit-deposit (CD) ratio has also started improving since September 2021 and is now at 71.3% as on 17 December 2021, compared to 69.9% as of 13 August 2021.
Most importantly, SBI says, the capital to risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) has touched a new peak of 16.6 %, and their provisioning coverage ratio (PCR) too increased from 67.6% in March 2021 to 68.1% in September 2021, excluding advance under collection account (AUCA). This will remain a positive enabler for future credit growth, it says.
According to the report, during the December 2021 quarter, incremental deposits in the banking system has declined by Rs2.2 lakh crore, whereas credit growth has picked up by Rs3.5 lakh crore.
"It may be noted that the deposit growth in the banking system has been led by current-account-saving-account (CASA) deposits far outpacing time deposits with people preferring precautionary motive given the continued uncertainties," the report says.
The recent increase in credit is also substantiated by SBI's in-house industry survey that is grounded in optimism. The survey suggests capacity utilisation remains robust, with more than two-thirds of respondents suggesting current capacity utilisation of more than 70% while 36% respondents, from diverse sectors such as textile, petrochemicals, and building materials indicated better utilisation levels.
Around 70% of respondents, major sectors including textile, food processing, chemicals, and power have shown optimism in business environment and favour going for capacity expansion over the next two-three years.
According to the SBI survey, corporates are resorting to different strategies to manage the elongated working capital (WC) cycle. "Gems & jewellery, sugar and textile are some of the sectors that has availed moratorium, while increase in bank loans was indicated by sectors such as textile, power, chemicals, building materials, and auto ancillary. This is also reflected in credit growth numbers," it added.
Further, the survey points out that cost cutting has been the buzz word across Industry post-COVID (49%) with adoption to online and hybrid business model faster than planned suggested by some (21%) respondents.
Many sectors such as steel and petrochemicals have chosen to reduce debt while sectors such as food processing, textile, and gem & jewellery are expecting rise in selling prices in next one-two years, the survey shows.
Intriguingly, SBI points out that the commercial paper (CP) issuances increased by around 40% in the first nine month of FY21-22 indicating recourse to working capital requirement. However, bond primary issuances declined by more than 25% during the same period.
"This indicates that the reverse credit flow from banks to bond market in FY20-21 is now on the wane as the deleveraging of corporates and substituting of high cost debt with low cost debt from the bond markets seems to have been largely completed. This is also possible as corporates across sectors are now taking recourse to term loans in anticipation of a future growth revival on the back of several government initiatives," the report says.
However, the recent surge in omicron infections has pulled down the SBI Business Activity Index to a two-month low. The percentage of rural infections to new cases at 18.8% are still at significantly low levels, while the share of top-15 districts in new cases is also at 51%.