Rise in Indian corporate lending signals new investment cycle

Birla

21/11/2022 01:30

By Ira Dugal
       MUMBAI, Nov 21 (Reuters) - Indian lenders 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)  SBI.NS .
    "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.  urn:newsml:reuters.com:*:nL4N32C280
    Across India's banking sector, 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  BOB.NS , 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 4.5 trillion rupees ($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.
        GOVERNMENT PUSH
  
    About a quarter of current capital expenditure is linked to
a government manufacturing-subsidy scheme launched in 2021
called Production-Linked Investment (PLI), CRISIL estimates. 
    Dixon Technologies  DIXO.NS , an electronics manufacturer
with annual revenue of about 150 billion rupees ($1.85 billion),
will receive incentives under the scheme for setting up
facilities in five sectors, including electronics.
    The company expects to invest up to 6 billion rupees ($74
million) and is partly funding the expansion through bank debt,
said Saurabh Gupta, its chief financial officer. "The borrowing
environment is conducive and banks are willing to lend,
particularly 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, adding to
demand for commodities such as steel and cement.
    That has 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
funding that with debt but is wary of rising interest rates,
said Harsh Lodha, chairman of its parent, MP Birla Group.
    "Capex appears to show recovery, led by incipient signs of
pickup in private capex and sustained support from public
capex," Morgan Stanley economists Upasana Chachara and Bani
Gambhir said in a Nov. 14 report. 
    The economy was benefiting from post-COVID reopening, policy
measures to reinvigorate capital expenditure, and stronger
balance sheets in the private sector, they said.
        RISK
  
        A slowdown in global growth due to rising interest rates
and pandemic restrictions in China presents a risk - or at least
limitation - to this investment pick-up, however.
    Already, October exports were lower than a year earlier, and
Nomura economists cautioned in a note this week that India's
investment cycles were closely linked to its export cycles. So
the current investment phase was not likely to be strong.
 urn:newsml:reuters.com:*:nL4N32C0V9
    "October marks the first contraction in exports in the
post-pandemic phase," they wrote. "The last time exports
contracted was back in February 2021 – attesting to the
increasingly challenging global environment, and India's
sensitivity to this global slump."
    Credit Suisse economists noted that the weakness was broad.
Only the electronics sector had seen higher exports in October.
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
India's credit to industry at 8-year high    https://tmsnrt.rs/3tx2DNZ
Jump in India's capital expenditure    https://tmsnrt.rs/3EdQpPm
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Ira Dugal; Editing by Bradley Perrett)
 ((Ira.Dugal@thomsonreuters.com; +91-9833024892;))