Lenders seem to be benefiting mostly because a jump in short-term commercial paper rates is driving companies into their arms, say analysts.
Loans climbed 11.6%, the most since July 2014, in the year through 19 February, according to fortnightly data from RBI.
Mumbai: A rebound in loan growth to a 20-month high sounds like good news for Indian banks as they struggle to shake off the impact of a surge in bad debts. But a deeper dive into the reasons behind the revival shows it may be unsustainable.
Lenders seem to be benefiting mostly because a jump in short-term commercial paper rates is driving companies into their arms, according to Prabhudas Lilladher Ltd. A weakening Indian rupee is also making domestic borrowing more attractive, with local companies raising $2.5 billion via foreign-currency loans in 2016 in the slowest start to a year since 2012.
Any pickup in credit could help revive economic growth and improve performance at banks after profitability, as measured by return on assets, slumped to the lowest in at least a decade. With distressed assets at a 14-year high, lenders in Asia’s third-largest economy are under pressure from regulators to give priority to cleaning up balance sheets.
“A strong revival in credit growth is still some time away,” said Nitin Kumar, a Mumbai-based banking analyst at Prabhudas Lilladher. “One reason for recent improvement is substitution of offshore funds and money-market instruments with bank loans, while the other is some pickup in retail loan demand. We expect loan growth to stay at about 12% this year and the next.”
Loans climbed 11.6%, the most since July 2014, in the year through 19 February, according to fortnightly data from the Reserve Bank of India (RBI). That compares with a 20-year low of 8.88% in February last year.
Three-month commercial paper (CP) rates have surged 105 basis points this year to 8.8%, data compiled by Bloombergshow, as India’s capital markets regulator restricted the amount of money that mutual funds can invest in debt instruments such as commercial paper and corporate bonds.
The rupee has weakened 0.5% this year to 66.5050 a dollar in Asia’s worst performance, after completing a fifth straight annual decline in 2015. Morgan Stanley this month lowered its year-end estimate to 73 from 70, while predicting a fall to 69 by the end of this quarter. That’s weaker than the currency’s record low of 68.845 seen in August 2013.
Foreign-currency borrowings by Indian companies so far in 2016 have more than halved from the $6.38 billion seen in the same period last year, according to data compiled byBloomberg.
Nomura Holdings Inc. expects lending growth to stay around 11.5% this year, Sonal Varma, a Mumbai-based economist, said in a phone interview on Friday.
The pickup in loans “may also reflect increased working capital needs” of corporates, Varma and her colleague Neha Saraf wrote in a report earlier this month. “The upside in credit growth is limited. Hence, instead of cheering the uptick, we remain in a wait-and-see mode.”
