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| Low deposit growth may hit credit |
| BS Reporter / Mumbai Sep 07, 2010, 00:01 IST |
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Macquarie report says govt expenditure may crowd out private borrowers.
The expansion in credit by banks may not be enough to match the high growth tempo, says a report by Macquarie Research. It points to a likely lag in the pace of raising funds by banks, as also the crowding out of private demand by higher government expenditure.
India’s gross domestic product (GDP) rose 8.8 per cent in the first quarter ended June. Contrary to most bank managements saying they expected to grow credit by around 22 per cent, the growth could be 300-400 basis points lower, said Macquarie. In its monetary policy report, the Reserve Bank of India (RBI) said it expected loans to grow 20 per cent.
Flagging five factors that could retard bank credit growth, Macquarie said companies had increased recourse to commercial paper (CP) for short-term credit. After the banking system switched to the base rate system, many companies are tapping the short-term CP market for working capital needs, as rates there are below eight per cent. CP issuance almost doubled to Rs 25,900 crore in July from Rs 13,300 crore in June.
Second, foreign borrowings by Indian companies through External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds have doubled on average over recent quarters. This reflects the improvement in the fund-raising environment abroad. More infrastructure companies, as well as infrastructure non-banking financial companies (NBFCs), may use this route to tap into funds, reducing their dependence on bank funding. Infra NBFCs like IDFC and Power Finance can now raise funds of up to 50 per cent of their net worth through ECBs without RBI approval.
Deposit lag
Third, funding issues may inhibit credit growth. Currently, the gap between deposit growth (14 per cent annual growth) and loan growth (20 per cent) is too wide, it said. “For credit growth to be at 22 per cent, deposit growth needs to be above 20 per cent, a tall order in our view. Balance sheets are already stretched, with the loan-to-deposit ratio at 73 per cent in the banking system,” says the report. It further added: “We believe credit growth beyond 20 per cent would come at the expense of margins, as banks would try offering unreasonable interest rates on deposits to push the deposit growth beyond 20 per cent.”
Fourth, Macquarie has reservations about the strength of the economic recovery. Excluding lending to the telecom sector, credit growth hasn’t picked up from the levels seen in March. The money raised to pay for 3G spectrum and broadband wireless access contributed to a 350-basis point growth in credit. Minus these (3G and BMA) short-term advances, the outstanding credit growth is closer to 18 per cent. RBI itself has admitted that credit growth has not been broad-based. Power is the only sector where there is some traction.
Referring to the effect of the fifth factor, of rise in government spending, Macquarie said it could result in a crowding-out effect. The government’s decision to spend an extra Rs 68,000 crore offsets its windfall gain from the recent 3G and BWA auctions. If the government borrowing plan needs to go through, credit growth could be 18-19 per cent at best. Banks would have to maintain statutory liquidity reserves of close to 28.5 per cent (current levels) for demand to meet the supply of government securities. This is assuming deposit growth is healthy at 20 per cent. The unwinding of excess SLR to fund credit growth is not possible, it said.
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