Rise in Indian corporate lending signals new round of investment

Rise in Indian corporate lending signals new round of investment

MUMBAI, Nov 21 (Reuters) – Indian lenders are expanding lending to local businesses at the fastest pace in more than eight years, a sign of a new round of private investment beginning in the world’s fifth-largest economy even as growing major developed economies and China is slowing down.

This international slowdown will limit the strength of India’s new cycle, economists say.

Private investment in India has been constrained for years by heavy corporate and bank debt and weak demand. But over the past two years, companies and lenders have cut costs and increased equity, and companies have been able to invest in new capacity as demand has strengthened.

It has strengthened so much that production capacity and working capital are now used more intensively. This, in turn, leads to an increase in demand for credit, said Swaminathan Janakiraman, chief executive of India’s largest lender, the State Bank of India (SBI) (SBI.NS).

“Ongoing investments are generating financing needs across industry and the service sector and to a small extent there is a shift in borrowing from bonds to loans,” Swaminathan said. “Business credit demand has been weak for too long and it’s time to pick up.”

SBI expects its corporate loan stock to grow 14-15% this year and 12% per year on average in 2023 and 2024. read more

Across India’s banking sector, lending is steadily increasing. In the last two weeks of October, it was up nearly 17% from a year earlier. Loans to businesses, including small, medium and large businesses, rose 12.6% in September, the highest annual growth rate since 2014, according to the latest industry data.

Sectors seeing high demand for loans range from infrastructure to real estate, iron and steel and new economy segments such as data centers and electric vehicle manufacturers, said MV Muralikrishna, Managing Director chief corporate lender at Bank of Baroda (BOB.NS), India’s second-largest public lender. “Six months ago, demand was mainly from the infrastructure sector, but it has now broadened.”

Annual capital expenditure by India’s 15,000 largest industrial firms will be 4.5 trillion rupees ($55 billion) in the financial year to March 2023 and 5 trillion rupees in each of the next two fiscal years, predicts Hetal Gandhi, director of research at CRISIL Market Intelligence and Analytics. These expenses will be about a third higher than the average of the three fiscal years before the COVID-19 crisis.

“While the initial part of these investments was financed by internal accruals, borrowing from banks is increasing and is expected to increase further next year,” Gandhi said.

Reuters Charts


About a quarter of current capital spending is tied to a government manufacturing subsidy program launched in 2021 called Production-Linked Investment (PLI), CRISIL estimates.

Dixon Technologies (DIXO.NS), an electronics maker with an annual turnover of about 150 billion rupees ($1.85 billion), will receive incentives under the program for setting up installations in five sectors, including electronics.

The company plans to invest up to 6 billion rupees ($74 million) and is partly financing the expansion through bank debt, said Saurabh Gupta, its chief financial officer. “The borrowing environment is conducive and banks are willing to lend, especially to businesses under the PLI program,” he said.

The government also plans to spend a record 7.5 trillion rupees ($92 billion) on infrastructure in 2022-23, which will increase demand for commodities such as steel and cement.

That prompted Birla Corp (BRLC.NS) to plan a $1 billion expansion of its annual cement manufacturing capacity to 30 million tonnes from 20 million tonnes. The company is partly financing this through debt, but is wary of rising interest rates, said Harsh Lodha, chairman of its parent company, MP Birla Group.

“Investment appears to be showing a recovery, led by nascent signs of recovery in private investment and continued support for public investment,” Morgan Stanley economists Upasana Chachara and Bani Gambhir said in a Nov. 14 report.

The economy was benefiting from the post-COVID reopening, policy measures to reinvigorate capital spending and stronger balance sheets in the private sector, they said.

Reuters Charts


A slowdown in global growth due to rising interest rates and pandemic-related restrictions in China, however, presents a risk – or at least a limitation – to this investment recovery.

Already, October exports were lower than a year earlier, and economists at Nomura warned in a note this week that India’s investment cycles were closely linked to its export cycles. The current investment phase was therefore not likely to be strong.

“October marks the first export contraction in the post-pandemic phase,” they wrote. “The last time exports contracted was in February 2021, a testament to the increasingly challenging global environment and India’s sensitivity to this global crisis.”

Credit Suisse economists noted that the weakness was widespread. Only the electronics sector recorded an increase in exports in October.

Reporting by Ira Dugal; Editing by Bradley Perrett

Our standards: The Thomson Reuters Trust Principles.

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