India’s Credit Expansion and its Implications
Source and Citation: Original reporting from unnamed author via ET Bureau, published January 5, 2024
Analysis for a Layman
Recent robust year-on-year credit expansion reported by public sector, private, and non-banking financial companies (NBFCs) signals optimism regarding corporate earnings and a potential revival in consumer demand. While this growth is positive, it comes with some challenges, notably margin pressures for banks due to higher funding costs.
- Year-on-year credit growth reported by banks and NBFCs is above 13-18%, indicating optimism about corporate earnings and consumer demand.
- Bank credit has expanded by 11.4% in the fiscal year so far, driven by retail lending.
- Bank deposits have grown at a slower pace (9%), making funding for business growth more expensive for lenders.
- Despite higher interest rates, strong appetite is observed across various lending categories, including vehicle finance, home loans, personal loans, and credit cards.
Impact on Retail Investors
For retail investors, the upcoming earnings season may bring positive surprises, especially for consumer-focused companies. The robust lending trends suggest strong top-line growth momentum. However, the impact of peaking policy rates on borrowers may slightly lag behind volume gains. Financial sector profitability could face challenges due to funding pressures, potentially leading to temporary derating if markets focus on bottom-line slippages.
Investors are advised to look beyond short-term margin compression concerns and consider quality lenders and companies in sectors like auto, mortgage, and retail that demonstrate customer wallet share gains and asset quality stability.
Impact on Industries
For India Inc, the higher system credit indicates the availability of financing for promising business ideas, aligning with government infrastructure goals. Increased credit supports new investments and higher capacity utilization, contributing to sustained volume and productivity gains. However, competitive intensity may rise in contested sectors, potentially slowing down growth.
Overall, the commercial sector appears poised to deliver around 7% GDP growth in fiscal 2024. Job data is expected to reflect a positive trend, barring external shocks. The recent years’ system credit growth has facilitated balance sheet cleanups, enhancing the stability of the financial services sector.
Long Term Benefits & Negatives
Over the long term, the stability of the financial services sector improves as asset quality withstands economic cycles. Corporate discipline is likely to enhance, with banks ready to fund credible projects, benefiting future productivity. However, sectors experiencing a surge in retail credit demand today might witness lower discretionary consumption in the future, and policies around data privacy and credit access may become more stringent.
Short Term Benefits & Negatives
In the short term, optimism from retail borrowers and increased capital expenditure contributes to positive wealth effects, better capacity utilization, increased incomes, and fresh hiring. However, some sectors may experience volatility, such as IT spending, hotels, and aviation. Policy restrictions in the agricultural sector could lead to stress. Investors are encouraged to use the earnings season as an opportunity to identify sector outperformers aligning with government goals and spending trends.
In summary, while the credit expansion is a positive signal for the economy, investors should remain vigilant about potential short-term challenges and focus on long-term growth prospects in select sectors.
Impact of Strong Credit Growth: Potential Winners and Losers
The early business data indicating robust Q3 performance for Indian Inc. fueled by strong credit growth presents both opportunities and challenges for various companies. Here’s a breakdown of potential winners and losers:
Indian Companies to Gain:
- NBFCs (Non-Banking Finance Companies): Companies like Bajaj Finance and L&T Finance Holdings, experiencing a surge in retail loans, are prime beneficiaries of robust credit growth. Their focus on retail lending aligns with increasing consumer demand, driving potential market share gains and revenue growth. Market sentiment likely positive, potentially boosting share prices.
- Mid-Sized Banks: Bandhan Bank, Bank of Maharashtra, Federal Bank, and RBL Bank, exhibiting credit growth exceeding 18%, stand to benefit from increased loan disbursements and interest income. Their agility and focus on specific lending segments could further propel their growth. Market sentiment could be cautiously optimistic, reflecting potential for positive earnings surprises.
- Companies in Buoyant Consumer Sectors: Businesses in sectors like retail, consumer durables, and automobiles, fueled by increased credit availability and consumer spending, should see increased demand and sales. Companies like Titan, Havells, Marico, and Maruti Suzuki could witness market sentiment improvement reflecting expected revenue and profit growth.
Indian Companies to Lose:
- Large Infrastructure and Manufacturing Companies: These companies, experiencing slower credit growth compared to other sectors, might face limitations on capital expenditure and expansion plans. This could impact companies like Larsen & Toubro, Tata Steel, and Reliance Infrastructure. Market sentiment could be neutral to slightly negative, reflecting potential concerns about growth prospects.
- Banks with Lagging Deposit Mobilization: Banks like Punjab National Bank, with credit growth outpacing deposit growth, might face pressure on their funding costs and margins. This could impact profitability and future lending capacity. Market sentiment could be mixed, with potential downside for banks struggling to manage funding costs.
- Limited Direct Impact: The news primarily impacts domestic Indian companies. However, global brands with significant Indian operations or exposure to Indian consumers might indirectly benefit from buoyant economic activity and increased spending.
- Potential Investment Opportunities: The strong credit growth and positive economic outlook could attract foreign investments into Indian equities and debt, particularly in sectors benefiting from increased consumer demand.
Note: These are potential impacts based on current information. The actual market response may vary depending on several factors, including individual company performance and broader economic conditions.
- Rising lending rates could pose future challenges for companies and consumers, impacting loan affordability and potentially dampening demand in the long term.
- The earnings season starting next week will provide further clarity on individual company performance and their response to the current credit growth trends.