Refinancing, working capital to drive corporate credit demand

Capex-driven loan demand still a while away

With economic turnaround and resolution of big-size stressed assets under way, demand for corporate credit is expected to gradually rise in 2018. Refinancing and enhanced working capital needs will be main themes for which companies will seek money from banks and markets.

There will also be a small element of capital expenditure driven by project expansion, increase in efficiencies and rebalancing.

Senior executives at State Bank of India say they expect resolution for some cases at the National Company Law Tribunal (NCLT) to go through and the investment cycle to begin in the new calendar year. Of the 12 big non-performing asset cases referred to NCLT in July-August, many might see resolution

Rising inflation, an outcome of increase in commodity prices and input costs, will push a rise in working capital finance. Enhanced capacity utilisation will play a minor role in demand for loans.

Abizer Diwanji, ·partner at EY, a professional services firm, said corporate credit would move up the chain but cautiously in 2018. Refinancing for companies coming out of NCLT on resolution and enhanced working capital requirement will drive demand.

Beside bank financing, the mainstay, companies are also increasingly tapping nonbanking finance companies for loans and bond markets for money.

Naresh Takkar, group chief executive at ratings agency ICRA, said while looking at funding to the corporate sector, one needed to take a holistic view. Considering bank loans and amounts raised through market instruments, including bonds, credit growth is close to 10 per cent. The expectation is that it will grow 11 per cent on a combined basis. A slight improvement in the pace of economic growth and rise in commodity prices will push demand for working capital, he added.

On clearing lenders’ dues, companies taken to NLCT will be treated as standard assets. These will throw up opportunities for refinancing. Banks starved of business opportunities will fight intensely to have a piece of the pie.

Asset creation will be government-led activity in infrastructure, especially roads. The private sector will not engage in capital expenditure much, as there is still surplus capacity in the system. Some companies are still in a deleveraging phase (reducing the debt on their books).

While looking for improved demand, banks are going to be extra cautious about lending to corporates. A top public sector bank executive said memories about the hit from a credit binge in the early part of the decade is still fresh in bankers’ minds. In fact, banks continue to reel under credit costs and, hence, are extra cautious in taking additional exposure on the corporate side.

Credit trend

According to Reserve Bank data, credit to industry grew one per cent in November, after a contraction through calendar 2017, reflecting increased demand due to busy economic activity in the second half of the year. This is against a contraction of 3.4 per cent during the same period the previous year.

The credit growth was led by a 0.8 per cent growth for large enterprises,4.6 per cent growth for micro and small enterprises and a contraction to 8.3 per cent for middle-size entities.

“Credit to major sub-sectors such as infrastructure, vehicles, vehicle parts & transport equipment, basic metal & metal products and mining & quarrying contracted/declined. However, credit growth to textiles, chemical & chemical products, all engineering, food processing and construction accelerated,” said the central bank.