Why Corporate Borrowers in India Return to Banks?
Given the uncertainty that has been imposed by the pandemic on the countries around the world, lower bank credit is the most visible consequence of it.
According to the reports, bank credit to industry has been mute for quite some time now, having fallen 1.7% in the year to date. But under current circumstances and a growing economy, bankers are highly expecting a revival in corporate loan growth. ‘
This can be emphatically possible due to the economy opening up, demanding a higher flow of credit in the market. What would make this a strong business case is the act that high recovery will guarantee high economic prospects in the future, which will ramp up the need for capital expenditure in the economy and hence higher borrowing.
talking about performances of different kinds of loans in the market, chunky industrial loans, which effectively make up about 30% of non-food credit, witnessed mild reactions and demand in the financial year 2021.
This severely underscored a trend among companies to conserve cash. On the other hand, retail credit demand in the economy expanded emphatically. What makes this expansion surprising is the fact that it expanded through the period of episodic lockdowns and curbs that were placed by the authorities on mobility.
but given the gloom that the banking sector had witnessed in the financial year 2021, higher growth prospects are making analysts believe that credit demand will now pick up.
A fact that is backed by an organization of consequence carries weight. Hence, to add weightage to the argument stated above, the Japanese leading investment bank, namely Nomura. Has strategically stated that growing optimism in the market and abundant liquidity should boost loan demand in the future.
with the high performance of the retail sector, what other sectors will encounter loan growths in the future? It is to be noted that other than the retail sector, the manufacturing and services sector will encounter growth and liquidity.
If the last, unconventional year is to be scrutinized, uncertainty had provided that better judgment of the investors and had forced the infrastructure and various sectors to close down in the economy.
This had severely affected the business environment, which in return has exhibited muted credit demand from traditionally asset-heavy industries. But this gives rise to a pertinent question with heavy stimulus running through the economy and lower interest rates, shouldn’t investment and spending be on the rise?
The answer is more complicated than a layman might anticipate it to be. Instead of undertaking newer investments in the market and emphatically adding more debt to their balance sheets, several companies in the asset-heavy sector effectively and strategically sought to deleverage.
This was done by harnessing cash flows in the economy to heavily improve their debt profiles, which had been faltering throughout the pandemic.
But was the pursuit to improve the debt profiles of the companies the only reason for the enactment of such a plan of action? It is to be noted that a good business practice is that when two motives can be achieved through one strategy, one should go for it and what certainly can be better than that?
And that is what had motivated the companies and corporations to go along with the plan to deleverage. It is to be noted that the better, debt-free profiles of the corporations should now encourage many companies to add debt to their portfolio as they undertake expansion of capital. Thus, with improved profiles, the extra room has been created for undertaking more expansion in the future.
Thus, one can effectively argue that after undergoing a strenuous and arduous phase of deleveraging over the past few years, the companies will be in a better position for re-leveraging. In fact, as a matter of fact, Indian financiers have emphatically and effectively saddled themselves with ample liquidity also known as capital buffers to tap the emerging opportunity.
Another reason that had led to smaller bank credit growth was the cheaper rates in overseas and the local bond markets that were looked upon by the companies as their source for their short- and medium-term funding needs.
What corroborates the claim that the loans will be on the rise is the fact that the banks are already seeing an uptick in demand from city gas, road projects, and renewable energy projects. Thus, given that one is witnessing such a strong demand even when the econom6 is struggling with a newer variant, one can definitely anticipate higher demand for loans in the future.
in totality, it can be stated that industry growth will emphatically emerge as a key driver to boost credit growth in the economy. Though, a word of caution is necessary that states that though India will witness an increase in loan demands, lags would still be prevalent.
This merely will be due to fact that the economy can be highly unpredictable mainly due to covid variant mutations and unorganized consumer and investors’ confidence. Though, even though lags might fraught the process, government spending and revival in consumer demand can be the potential triggers.
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