Banks Embrace Corporate Lending: A Sign of Economic Optimism

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Banks are exhibiting renewed optimism towards corporate lending, as evidenced by the robust growth witnessed in the second quarter of the current financial year ending September 30, 2023. Several major banks reported notable year-over-year (y-o-y) growth in corporate lending during this period. SBI registered a healthy 6.62 percent y-o-y growth, while Bank of Baroda, ICICI Bank, Indian Bank, and Canara Bank posted impressive figures of 16.5 percent, 15.3 percent, 11 percent, and 10.24 percent, respectively, in their domestic corporate advances.

This positive trend is attributed to several factors, including healthy balance sheets of both banks and corporates, strong demand for credit, and easing input cost constraints. These factors are encouraging expansion in industrial activity, evident in increased capacity utilization, according to Bibekananda Panda, Senior Economist at State Bank of India.

Panda further noted that corporate credit growth is primarily driven by sustained buoyancy in the services sector, with credit growth in this segment reaching 25 percent, while industrial credit growth remains muted at nearly 7 percent.

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Data from the Reserve Bank of India (RBI) indicates that corporate lending grew by 5.4 percent during the period April-August 2023. This marks a significant improvement compared to the previous year, when corporate lending grew by 6.4 percent in April-August 2022, following negative growth of 1.7 percent in the same period in 2021.

A senior official from the Bank of Baroda expressed optimism about the prospects for corporate lending, stating that certain infrastructure segments, excluding a few like power, are showing promising prospects. Lenders, in general, are becoming increasingly positive about lending compared to a couple of years ago.

The outlook for corporate lending remains positive for the current financial year. In the latest round of the Bank Lending Survey conducted by the RBI, bankers expressed optimism about overall loan demand during Q3FY24, with a particular focus on mining, infrastructure, and retail sectors.

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Prasanna Tantri, Executive Director of the Centre for Analytical Finance at the Indian School of Business (ISB), emphasized that corporate loan growth is a healthy sign, indicating an early revival of private capex, which has been sluggish in recent years. He further stated that government capital expenditure alone cannot sustain high economic growth.

Amidst concerns about banks’ increasing exposure to retail lending, is corporate lending safe for banks?

According to the RBI’s Monetary Policy Report for October 2023, the interest coverage ratio (ICR) of listed non-financial private companies in the manufacturing, information technology (IT), and non-IT services sectors remains high, indicating comfortable debt servicing capacity. The ICR is calculated by dividing earnings before interest and taxes (EBIT) by interest expenses.

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