Credit growth to industry slows as new projects decline

The sluggish credit growth to the industry indicates that private investments are yet to pick up. “Though India’s private capex cycle has shown early signs of a revival, the outlook over the medium term looks positive. With capacity utilisation rising above 75% coupled with a deleveraged balance sheet, we could expect the private investment cycle to accelerate. First quarter data shows improving profitability driven by the easing of input prices. The improvement in corporates’ profitability will aid private capex cycle revival,” said a Care Rating report.

While the private sector has outpaced the government in terms of announcements of new projects in the first half of FY24, it has lagged the government sector in terms of completed projects and projects under implementation.

CMIE’s data on projects show a steep slowdown in net new projects in the first half of FY24. The value of new projects announced fell to Rs 1.2 lakh crore in Q2 of FY24 from Rs 6.6 lakh crore in Q1 of FY24 and Rs 13.4 lakh crore in Q4 of FY23. It’s important to note that a substantial portion of the new investment projects in Q4 of FY23 and Q1 of FY24 were driven by Air India’s and InterGlobe Aviation’s aircraft purchases, a factor absent in Q2 of FY24, Care Ratings said.

Additionally, the value of dropped projects rose from Rs 3 lakh crore in the Q4 of FY23 to Rs 4.2 lakh crore in Q1 of FY24 and Rs 4 lakh crore in Q2 of FY24. A rise in the value of dropped projects along with a slowdown in announcements of new projects also pushed net new projects in the negative territory in the first half of FY24. Net new projects fell into negative territory for the first time since March 2021, the report said.

Among major industries, credit growth (year-on-year) to basic metal & metal products and textiles accelerated in August 2023 as compared with the corresponding month of the previous year, while that to chemicals & chemical products, food processing and infrastructure decelerated.

On the other hand, growth in personal loans was at 18.3 per cent as of August 2023 as against 19.4 per cent a year ago. If the merger of HDFC with HDFC Bank is taken into account, the growth was at 30.8 per cent. Credit card outstanding shot up by 30 per cent to Rs 2.17 lakh crore on a year-on-year basis as against 26.8 per cent last year. Gold loan outstanding increased by 22.1 per cent to Rs 96,265 crore as against 9.2 per cent.

On October 6, while unveiling the monetary policy, the RBI cautioned banks and non-banking finance companies (NBFCs) about the high growth in the personal loan segments for any signs of stress. RBI Governor Shaktikanta Das said certain components of personal loans are recording very high growth. “These are being closely monitored by the Reserve Bank for any signs of incipient stress,” Das said.

According to an SBI research report, lenders could also draw comfort from the fact that secured loans are mostly long term (housing loans constitutes nearly half of the retail portfolio) while unsecured loans (credit card outstanding) are mostly demand loans that have lower comparative presence on lenders’ balance sheet while higher RoI (return on investment) also nudges borrowers to opt for pre-payment in many cases.

According to RBI data, credit growth to agriculture and allied activities improved to 16.6 per cent (y-o-y) in August 2023 from 13.4 per cent a year ago. Credit growth to services sector accelerated to 20.7 per cent (y-o-y) in August 2023 from 17.4 per cent a year ago, primarily due to non-banking financial companies (NBFCs) and commercial real estate.

Analysts said the outlook for bank credit offtake continues to remain positive for FY24, supported by factors such as economic expansion and a continued push for retail credit which has been supported by improving digitisation.