Credit growth remains tepid in India

Despite signs of a gradual improvement in production numbers and discretionary spending, loan growth remains tepid. Non-food credit has averaged 9.5% YoY so far this fiscal year, down from 11% last year and FY12-14 average of 16%. Disbursements have slowed across the board, with loans to industries up a subdued 4% this year, services up 7% and agricultural loans at 12%. 

There are reasons why a revival in credit growth might lag the recovery process, with the initial upturn likely to be less credit-intensive than in the past. Firstly, financing costs have not fallen significantly. Policy rates are down 125bps since January, while banks' base rates have been lowered by 70bps. The recent bunched-up rate cut, regular moral suasion and proposed regulatory changes to calculate lending rates are expected to improve the sensitivity of retail rates to policy changes in the coming months. In the meantime, transmission into the money market rates has been much higher at more than 100bps.

Next, on the banks' end, concerns over asset quality deterioration and higher due diligence have hindered a strong supply-side push for credit growth. Including restructured and non-performing loans, banks' overall stressed advances jumped to over 11% of total advances by mid-2015. Further, cheaper non-bank funding alternatives, including corporate bonds/ commercial papers have diverted part of the working capital/ short-term funding needs. Borrowing costs here are down nearly 100bps since start of the year. While external commercial borrowings are slowing this fiscal year, some of that slack has been picked by domestic funding alternatives. 

Finally, demand for capex and expansion-related loans will rise only once demand conditions improve. Capacity utilization rates eased to 70% this year from over 80% in FY11-12, suggesting significant slack in the system. Stalled projects meanwhile jumped back to 7.6% of GDP in the Sep quarter from sub-7% quarter before, according to the press. Not surprisingly, an increase in new investment announcements is being viewed with scepticism, as familiar hurdles of land acquisition, delay in clearances etc. are still to be completely ironed out. 

"We expect credit growth to stabilise at 9-10% levels in the months ahead, though the pace is unlikely to deviate from 10-13% YoY until domestic demand and investment interests are on a clear upswing", notes DBS Group Research.