Corporate loans at 7 year low. But to troubled sectors! - Chart Of The Day 10 May 2016 - Equitymaster

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Corporate loans at 7 year low. But to troubled sectors!
May 10, 2016

Vivek Kaul recently gave a very detailed insight into why banks' deposit growth is at a 53 year low.

Here is what he wrote...

    Banks make loans from deposits which they are able to raise. And if the deposit growth is almost at an all-time low, their ability to cut interest rates on their loans, will be limited. If banks cut deposit rates any further, the deposit growth will fall further and this will hurt their ability to give out loans.

He elaborated further...

    The point is that if the loan growth does pick up a little more from here, the incremental credit deposit ratio is likely to get worse in the days to come. If we take this possibility into account, banks will have a tough time cutting down their deposit rates any further. And that being the case, the chances of lending rates being cut further are limited.

So we are hardly surprised that even banks' incremental lending to corporates is currently at a 7 year low.

But what is worrying is the fact that bank lending to the infrastructure sector accounted for a third of total loans in FY16. Moreover, last fiscal, bank lending to the struggling metals and metals sectors accounted were 15% of corporate loans. Putting it bluntly, over half of bank credit to industry is to the troubled infrastructure and metals sectors. Over 55% of the incremental corporate loans went to the infrastructure sector. Another 38% went to the iron and steel sector. Now, unless there's a turnaround soon in these businesses, the lenders are bound to be in deep trouble.

Data source: Mint, CMIE;
* - Agriculture and allied activities

This Chart Of The Day was published in The 5 Minute WrapUp - A Chartist's View on Sensex versus Gold

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