The increase in loans to Indian companies signals a new round of investment

MUMBAI, Nov 21 (Reuters) – Indian lenders are expanding loans to local companies at the fastest pace in more than eight years, a sign of a new round of private investment starting in the world’s fifth largest economy, despite growth in large developed economies and China slows down.

That international slowdown will limit the strength of India’s new cycle, economists say.

Private investment in India has been held back for years by heavy corporate and bank borrowing and weak demand. But over the past couple of years, companies and lenders have cut costs and increased equity capital, and companies have been able to spend on new capacity as demand has strengthened.

It has strengthened so much that production capacity and working capital are now being used more intensively. That, in turn, is driving higher demand for credit, said Swaminathan Janakiraman, chief executive officer of India’s largest lender, the State Bank of India (SBI) (SBI.NS).

“The capex that is happening is driving funding requirements across the industrial and services sector and, to a small extent, there is a shift in lending from bonds to loans,” Swaminathan said. “Demand for corporate credit has been low for too long and it’s time for a recovery.”

SBI expects its stock of business loans to grow between 14% and 15% this year and 12% on average annually in 2023 and 2024. read more

Across the Indian banking sector, loans are steadily increasing. In the last two weeks of October, it was up nearly 17% year-over-year. Lending to companies, including small, medium and large businesses, rose 12.6% in September, the highest annual growth rate since 2014, the latest sector data shows.

Sectors seeing strong loan demand range from infrastructure, real estate, steel and new economy segments such as data centers and electric vehicle manufacturers, said MV Muralikrishna, general manager for large corporate loans at Bank of Baroda ( BOB.NS), India’s second largest state lender. “Six months ago, demand was mostly from the infrastructure sector, but now it’s broadened.”

Annual capital expenditure for India’s 15,000 largest industrial corporations will be Rs. 4.5 trillion ($55 billion) in the financial year to March 2023 and Rs. Hetal Gandhi, Research Director of CRISIL Market Intelligence and Analytics. That spending will be about one-third higher than the average over three fiscal years prior to the COVID-19 crisis.

“While the initial part of these investments has been financed through internal accruals, loans from banks are on the rise and are expected to grow further next year,” Gandhi said.

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GOVERNMENT PUSH

About a quarter of current capital spending is tied to a government production subsidy scheme launched in 2021 called Production-Linked Investment (PLI), according to CRISIL estimates.

Dixon Technologies (DIXO.NS), an electronics maker with annual sales of about 150 billion rupees ($1.85 billion), will receive incentives under the program to build facilities in five sectors, including electronics .

The company plans to invest up to 6 billion rupees ($74 million) and is funding the expansion partly through bank debt, said Saurabh Gupta, its chief financial officer. “The lending environment is favorable and banks are willing to lend, especially to companies under the PLI scheme,” he said.

The government also plans to spend a record Rs 7.5 trillion ($92 billion) on infrastructure in 2022-23, boosting demand for raw materials such as steel and cement.

This prompted Birla Corp (BRLC.NS) to plan a $1 billion expansion of its annual cement production capacity to 30 million tons from 20 million tons. The company finances it partly with debt, but is wary of rising interest rates, said Harsh Lodha, chairman of parent company, MP Birla Group.

“Capital spending appears to be picking up, led by incipient signs of recovery in private capital spending and sustained support from public capital spending,” said Morgan Stanley economists Upasana Chachara and Bani Gambhir in a report dated Nov. 14.

The economy was benefiting from post-COVID reopening, policy measures to reinvigorate capital spending and stronger balance sheets in the private sector, they said.

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RISK

However, a slowdown in global growth due to rising interest rates and pandemic-related restrictions in China poses a risk, or at least a limit, to this investment recovery.

October’s exports were already lower than a year earlier, and Nomura economists warned in a note this week that India’s investment cycles were closely tied to its export cycles. So the current investment stage was probably not strong.

“October marks the first export contraction in the post-pandemic phase,” they write. “The last time exports contracted was in February 2021, a testament to the increasingly challenging global environment and India’s sensitivity to this global crisis.”

Credit Suisse economists noted that the weakness was large. Only the electronics sector had recorded higher exports in October.

Reporting by Ira Dugal; Editing by Bradley Perrett

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