Energy Lending, Shift Away From Bonds Pushes Industry Credit Growth To 12.6%

As bond markets factor in central bank rate hikes and swiftly readjust to the interest rate upcycle, companies are shifting their borrowing to bank credit.

Industrial credit in September grew 12.6% year-on-year, the fastest pace this fiscal. While credit demand from micro, small and medium-sized industries saw an uptick of 27% and 36%, respectively, credit appetite of large industries rose about 8%.

A good portion of the credit demand coming from micro, small and medium enterprises is also being driven by the Emergency Credit Line Guarantee Scheme or ECLGS, according to Krishnan Sitaraman, senior director at Crisil Ratings.

Rising credit demand from industries was also reflected in the second-quarter results of banks for fiscal 2023. HDFC Bank Ltd. saw its corporate and wholesale loans rise by 27% year-on-year. ICICI Bank Ltd. and Axis Bank Ltd. also grew their corporate loan books by 23% and 7%, respectively, during the period.

"We are seeing lot less issuance of corporate bonds, which probably means that companies are issuing less bonds and borrowing more directly from the bank," Mihir Vohra, chief investment officer at Max Life Insurance Co., told BQ Prime in a recent interview.

Inflation has also played a big role in pushing up working capital loan demand from industries, Vohra said.

Bond prices have gone up on an average of 200 basis points over the last six months, Samuel Joseph Jebaraj, deputy managing director at IDBI Bank Ltd., told BQ Prime.

Among industries, the petroleum, coal and nuclear fuel sector saw a sharp jump in credit demand at 76% year-on-year in September.

"It is just on account of inflation on the commodity inputs," Jebaraj said, referring to the uptick in credit demand from sectors like fertilisers, petroleum and coal.

"When the cost of inputs goes up, even at the same operating level and even at the same capacity utilisation, the drawdown of working capital will be much higher," he said.

"We've not seen too much of bond issuance by fertiliser and oil companies this year so far," Karthik Srinivasan, group head-financial sector ratings ICRA Ltd., told BQ Prime.

For oil companies, the input prices have gone up but the final selling price hasn't appreciated to the same extent, Sitaraman said.

"Some bit of [credit] growth is also coming in from them managing the difference between the growth in input prices and the realisation," he said.

While industrial credit grew at the fastest clip this fiscal in September, personal loans have been a major growth engine for bank credit. Overall, personal loans grew 19.6% year-on-year in September, with housing loans growing at 16% and consumer durable lending seeing a surge of 60.7%.

Bank credit to NBFCs also grew 30% in September. Even as mutual funds have cut their exposure to NBFC debt, banks appear increasingly keen to lend money to the financiers.

Bank credit to NBFCs has been rising for the last four years. According to Sitaraman, it has accelerated further this fiscal because of the growth revival at NBFCs and, to an extent, because of the “bond market substitution” as interest rates on bank loans have not gone up to the same degree as on bonds.

Some banks have also been buying securitised pools of loans from NBFCs, he said. The pools aren't reflected in bank credit to NBFCs, but instead show up in overall growth of retail credit.

"Banks are using the excess liquidity which they currently have to push credit growth," Srinivasan said.

To keep pushing it though, banks will have to ensure they raise enough deposits to meet demand. If they're unable to do that, and interest rates start levelling out, bond investors might end up coming back to fund industries, he said.