Four years ago, bank loans to the industrial sector was growing at roughly 20 percent a year. The rate of growth has been on a downward trajectory since, slipping into the negative territory in August 2016, the first in a decade. In August scheduled commercial banks’ outstanding loan to the industrial sector contracted by 0.2 percent. The weakness over the last few months has stemmed from low corporate demand and a lack of fresh projects, says a note by domestic broking house Religare. Pawan Goenka, Executive Director at Mahindra & Mahindra (M&M) concurs. In a recent interview to CNBC-TV18, Goenka noted the manufacturing sectors are still running at average 70-75 percent utilisation and investments will begin only once utilisation breaches 80 percent. “So, if we have one more year of demand growth then we will get into a zone of where there is a need to invest in capacity,” he said. He also pointed to other factors like leveraged balance sheets both for banks as well as the industrial houses as another important reason for the weak credit trends. Growing risk aversion among public sector bankers following the non-performing assets crisis was also cited to be a key reason leading to credit availability issues by former Reserve Bank Governor Raghuram Rajan. This could well be inferred from the fact that corporate have steered towards alternate modes of short-term financing like commercial papers where rates are now attractive. In a note released in August, Karthik Srinivasan, Senior Vice President and Co-Head of Financial Sector at ratings agency ICRA said the CP market is expected to remain an attractive source of funding for better-rated corporates in the current environment of ample adequate systemic liquidity, sound inflows into key investor segments and structural inability of banks to sharply reduce their lending rates. Meanwhile, Religare does not expect any material improvement in credit growth for FY17 and builds in a modest 12-percent year-on-year growth for the year.
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