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Rise in corporate lending signals new investment cycle

Mumbai, Nov 21, 2022

Lenders in India are expanding lending to local corporations at the fastest pace in more than eight years, a sign of a new private investment cycle starting in the world's fifth-largest economy even as growth in large developed economies and China slows.

That international slowdown will limit the strength of the new Indian cycle, economists say.

Private investment in India was constrained for years by heavy indebtedness of companies and banks and by weak demand. But over the past two years, corporations and lenders have cut costs and raised equity capital, and companies have been able to spend on new capacity as demand has strengthened.

It has strengthened so much that productive capacity and working capital are now being used more intensively. That, in turn, is driving the higher demand for credit, said Swaminathan Janakiraman, managing director at India's largest lender, State Bank of India (SBI).

"The capex that is taking place is generating financing requirements across the industry and the services sector and to a small extent there is a shift in borrowings from bonds to loans," said Swaminathan. "Corporate credit demand has been low for too long and it is time for a pick-up."

SBI expects its stock of corporate loans to rise by between 14% and 15% this year and by 12% a year on average in 2023 and 2024.

Across banking sector in India, lending has been rising steadily. In the last two weeks of October, it was up nearly 17% on a year earlier. Lending to corporations, including small, medium and large businesses, was up 12.6% in September, the highest rate of annual growth since 2014, the latest sectoral data shows.

Sectors seeing strong loan demand range from infrastructure, to real estate, iron and steel and new economy segments such as data centres and electric-vehicle makers, said M V Muralikrishna, chief general manager for large corporate lending at Bank of Baroda, India's second-largest state-owned lender. "Six months ago, the demand was mainly from the infrastructure sector, but it has now broadened out."

Annual capital spending for India's 15,000 largest industrial companies will be Rs 4.5 lakh crore ($55 billion) in the financial year to March 2023 and 5 trillion rupees in each of the following two financial years, forecasts Hetal Gandhi, director for research ay Crisil Market Intelligence and Analytics. That spending will be about a third higher than the average in three financial years before the Covid-19 crisis.

"While the initial part of these investments were funded through internal accruals, borrowings from banks are rising and expected to grow further next year," Gandhi said.


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