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Economy: Who is borrowing?

Dec 2, 2004

The latest report on Trends and Progress of Banking in India by the Reserve Bank of India (RBI) throws some very interesting light on various aspects of the economy. We, in this article, focus on the demand for money from the corporate side and where it is coming from?The table below shows the share of the key sectors in the overall gross bank credit in FY03 and FY04. The last column is the change in percentage terms, in the descending order. As is evident from the table, demand for money from infrastructure related sectors like power, roads, electricity and telecom have witnessed a faster rise and consequently, is reflected in the proportionately higher share of the gross bank credit. With the government keen to bring in more public-private partnership in the infrastructure related sectors, demand for credit from these sectors is likely to grow at a faster clip going forward.

Who is growing faster…
(% gross credit)*FY03FY04Change (%)
Top five
Power5.1%6.3%1.2%
Road and ports1.9%2.9%1.1%
Electricity3.8%4.5%0.7%
Telecom2.0%2.7%0.7%
Textiles10.5%10.9%0.5%
Total of the above23.1%27.3%4.2%
Source: Report on Trends and Progress of Banking in India

At the same time, though the gross bank credit to the iron and steel sectors increased in absolute terms in FY04 (stood at Rs 263 bn or around 1% of GDP), it witnessed a decline in percentage share terms. With the steel cycle reversing in FY02 and profitability improving dramatically, steel companies have been able to retire the high cost debt in the last three years. However, with most of the steel companies in the closing stages of finalising their expansion plans, the demand for money from this sector is likely to increase in the future. So is the case with the petroleum sector as well.

Who is growing slower…
(% gross credit)*FY03FY04Change (%)
Other industries19.3%18.7%-0.6%
Rest16.3%15.5%-0.8%
Chemicals10.8%9.8%-1.0%
Petroleum5.0%3.9%-1.1%
Iron and steel9.5%8.4%-1.1%
Total of the above60.9%56.3%-4.6%
Source: Report on Trends and Progress of Banking in India

As per the RBI "Credit growth during the first half of 2004-05, traditionally a slack season for credit off-take, has been one of the highest in recent years. Inspite of a rapid acceleration in non-food credit growth caused by lending to the retail segment, the pick up in non-food credit appears to be broad-based. In the Union Budget 2004-05, the Central Government announced a broad outline of programmes for doubling the flow of credit to agriculture in three years with a credit growth of 30% for 2004-05. The flow of credit to agriculture may lead to greater credit penetration by replacing non-institutional sources of finance"

It is clearly known that after the mid-1990 capacity expansion, India Inc was on a restructuring drive, which included rationalisation of employees, divestment of non-core businesses, reducing the debt burden and efficient utilisation of existing capacities. Against a 14% to 15% CAGR in topline for the manufacturing sector in the last five years, the CAGR in gross fixed asset addition is estimated at just around 2%, which substantiates the fact that the existing capacities have been utilised optimally. With another investment recovery taking shape, it is likely to have a positive impact on the Indian economy. More importantly, most of the top rung corporates are prepared to face competition at the global level.

As Mr. Mahesh Vyas of CMIE puts it "there are fewer industrialists who are capable and who are willing to take the risk and challenges for liberalisation. It has been a pretty long time. But the liberalisation process has distinguished the men from the boys".

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