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Banking: Changing credit trends

Apr 12, 2003

Banks have had a good FY03, not only in terms of profitability alone but also from key policy announcements that will change the shape of things to come. Bank credit growth too has been strong this year. We take a look at the reasons for this growth and what can be expected on the credit off-take front going forward. In the period between April-March 7th FY03, total net credit (total advances deducted by repayments) has grown at a healthy rate of 12.2% compared to 10.9% in the same period last year. This growth rate does not account for the merger of ICICI Bank and ICICI. Unlike last fiscal, the credit growth drivers have been different in FY03. Credit growth in FY02 was mainly fueled by the robust growth in food credit on the back of a good monsoon in the year 2001. However in FY03, non-food credit off-take was the major contributor to the credit growth.

Net non-food credit has grown by 15.7% in the period between April-March 7th FY03. At the same time, food credit has contracted by 7.9% in the same period. The corresponding figures in the last year are 9.9% and 34.8% respectively. The fall in food credit has been mainly due to the poor monsoons in 2002. Non-food credit, on the other hand, was mainly driven by increased lending to the medium and large industries as well as to the retail segment.

According to the RBI, the gross credit to the industrial sector has grown by 9.8% in the period between April-December FY03 compared to the same period last year. Even within this broad classification, lending to the infrastructure sector has seen the highest growth (26.1%) among all the other sectors. This is mainly due to the various infrastructure activities going on in the country like the highway projects, including the Golden Quadrilateral as well as the North-South-East-West highway corridor projects. Lending may also have been higher due to increased private sector participation. Unlike earlier times, there is increased participation in the infrastructure sector by private parties and this has led to increased borrowing.

The industries where credit off-take has picked up were gems and jewellery, steel, textiles and computer software. One of the main reasons for this strong growth in credit off-take from these sectors is because exports have grown significantly. This indicates that these industries are witnessing surge in demand from abroad and hence the need for credit for working capital as well as capital expenditure needs. An indication of the exports growth figure is that merchandise exports from India to the United States has risen by 21.4% in 2002. A major component of these exports were mainly from industries like gems and jewellery and textiles. The engineering, coal, sugar and petroleum sectors however showed subdued credit off-take.

In the retail segment, robust growth in the credit requirements for the housing industry continues to favour the banking sector. The housing finance industry has been growing at a blistering pace mainly due to lower financing cost and the existing demand supply gap in the industry. Gross credit growth to this industry stood at 37.1% in the April-December 2002 period. Other retail segments like car, two wheeler and consumer durable loans also contributed significantly to the growth in the gross credit off-take in FY03.

Let us take a look at what is in store for the banking sector, in terms of credit growth, going forward. India’s core sector is witnessing a revival of sorts. Statistics indicate that the Index of Industrial Production (IIP) has risen by 5.2% in the period between April-December 2002. The manufacturing sector especially led by steel and cement industries has shown significant improvement in FY03. We expect the trend to continue and therefore, are likely to keep the momentum going. The textiles industry may also witness a higher demand for credit, as there is a marked improvement in export demand. After the recent Budget, the textile industry is in for some good times ahead. Retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years.

The Indian banking sector has witnessed a sea change as far as the trends in credit off-take are concerned. Retail segment is the new thrust area for banks, which as we mentioned earlier, has strong long-term growth potential. After all, India is underserved when it comes to credit availability. As the Indian industry is witnessing a revival driven by domestic as well as export demand, credit off-take is likely to be healthy especially when capital expenditure needs surface. Taking these factors into consideration, one is optimistic about the future.

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