Mumbai: Indian lenders are lending to local corporates at the fastest pace in more than eight years, signaling a new private investment cycle in the world’s fifth-largest economy, even as growth slows in major advanced economies and China.
Economists say the international slowdown will limit the strength of the new Indian cycle.
Private investment in India was hampered for years by heavy corporate and bank indebtedness and 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 become so strong that productive capacity and working capital are now being used more intensively. That, in turn, is driving higher demand for credit, said Swaminathan Janakiraman, managing director of India’s largest lender, State Bank of India (SBI).
“The capex that is happening is creating financing needs across industry and the services sector and to some extent there is a shift in borrowing from bonds to debt,” Swaminathan said. “Demand for corporate credit has been low for too long and it is time for a pick-up.”
SBI expects its corporate loan stock to grow between 14% and 15% this year and an average of 12% per annum in 2023 and 2024.
In the banking sector of India, there is a steady growth in lending. In the last two weeks of October, it was up about 17% from a year earlier. Lending to corporations, including small, medium and large businesses, rose 12.6% in September, the highest rate of annual growth since 2014, the latest regional data showed.
Sectors with strong loan demand range from infrastructure to real estate, iron and steel and new economy segments such as data centers and electric-vehicle makers, said MV Muralikrishna, chief general manager for large corporate lending at India’s second-largest Bank of Baroda. State owned lender. “Six months ago, there was demand mainly from the infrastructure sector, but now it has become broader.”
Annual capital expenditure for India’s 15,000 largest industrial companies will hit Rs 4.5 trillion ($55 billion) in the fiscal year to March 2023 and Rs 5 trillion in each of the next two fiscal years, estimates Hetal Gandhi, director of Crisil Market Intelligence and Research. Is. Analytics. This expenditure will be about a third more than the average in the three financial years before the Kovid-19 crisis.
“While the initial part of these investments was financed through internal resources, lending from banks is increasing and is expected to increase further next year,” Gandhi said.
government push
Crisil estimates that about a quarter of current capital expenditure is linked to a government construction-subsidy scheme, called Production-Linked Investment (PLI), to be launched in 2021.
Dixon Technologies, an electronics maker with annual revenue of about 150 billion rupees ($1.85 billion), will receive incentives under the plan to set up facilities in five sectors, including electronics.
Saurabh Gupta, the company’s chief financial officer, said the company expected to invest up to 6 billion rupees ($74 million) and was partially financing the expansion through a bank loan. “The lending environment is favorable and banks are willing to lend, especially to companies under the PLI scheme,” he said.
The government also plans to spend a record 7.5 trillion rupees ($92 billion) on infrastructure in 2022-23, which will boost demand for commodities such as steel and cement.
This has prompted Birla Corp to draw up a $1 billion plan to increase its annual cement manufacturing capacity from 20 million tonnes to 30 million tonnes. The company is partially financing it with debt but is wary of rising interest rates, said Harsh Lodha, chairman of its parent MP Birla Group.
“Capex recovery showing early signs of pick-up in private capex and continued support from public capex,” Morgan Stanley economists Upasana Chachra and Bani Gambhir said in a November 14 report.
He said the post-Covid reopening of the economy, policy measures to revive capital expenditure, and a strong balance sheet in the private sector were benefiting.
risk
However, a slowdown in global growth due to rising interest rates and pandemic restrictions in China presents a risk – or at least a limit – to this investment pick-up.
Already, October exports were lower than a year earlier, and economists at Nomura cautioned in a note this week that India’s investment cycles were closely linked to its export cycles. Hence the current investment phase was unlikely to be robust.
“October is the first contraction in exports in the post-pandemic phase,” he wrote. “The last export contract was due in February 2021 – attesting to the increasingly challenging global environment and India’s sensitivity to this global slowdown.”
Credit Suisse economists noted that the weakness was widespread. Only the electronics sector saw higher exports in October. – Reuters
(Reporting by Ira Dugal; Editing by Bradley Perret)
Disclaimer: This report is generated automatically from Reuters news service. ThePrint is not responsible for its content.
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