Bank credit growth rose to its highest in more than four years as the liquidity crunch in the money market prompted borrowers to seek bank funding.
According to the latest RBI data, bank credit rose 14.30 per cent as of October 12, 2018, to Rs 92,60,572 crore as against Rs 81,01,532 crore in the same period of last year. Credit growth stood at 12.51 percent in the previous fortnight. Credit growth is now at its highest in over four years.
According to banking sources, bank credit growth is expected to rise further in the wake of the liquidity squeeze in the money market. The liquidity squeeze for non-banking financial companies (NBFCs) is set to intensify in the next few months with an estimated Rs 80,000-100,000 crore of their debt papers coming up for redemption between November and March. Even as the government and the Reserve Bank of India have taken certain measures to open liquidity taps, deteriorating condition in the financial markets have made it difficult for several NBFCs to roll-over their existing obligations at attractive rates. Unlike banks, NBFCs do not have access to low-cost public deposits and have to heavily rely upon commercial paper and commercial debt markets. The continuing defaults by Infrastructure Leasing & Financial Services group on its debt obligations have jolted the debt raising plans of many NBFCs. While top-rated companies are able to raise debt, funding taps for lower-rated NBFCs have either turned dry or the interest costs have gone up sharply.
On the other hand, banks under the prompt corrective action (PCA) have showed significant improvement in their operations. The RBI is likely to relax the norms for PCA banks if they show further improvement, enabling a higher growth in credit offtake.
Rating firm Crisil’s credit ratio (number of upgrades to downgrades) stood at 1.68 times in the first half of fiscal 2019, compared with 1.88 times and 1.45 times in the first and second halves of fiscal 2018, respectively. For the first time in five years, the credit ratio for investment-linked sectors at 2.15 times printed higher than the overall credit ratio. The uptick can be seen in sectors such as steel, construction and industrial machinery that, besides buoyant commodity prices, benefited from the government’s infrastructure spending even as private investments lag. As for domestic consumption-linked sectors, the demand growth drivers remain strong, but rising interest rates could act as a mild dampener.