Introduction
The Indian economy has experienced a slowdown in corporate investments, leading to lackluster demand for loans and a moderation in the growth of bank credit to industries. This article explores the factors contributing to this trend and examines the implications for different sectors. Despite the overall non-food credit growth of 20.8% reported by the Reserve Bank of India (RBI) in November 2023, loans to industries registered a lower year-on-year growth of 6.6% to Rs 36 lakh crore. This slowdown in credit growth is particularly evident in the large corporate segment, which accounts for around 72% of total loans to industry.
Factors Affecting Corporate Investment and Loan Demand
1. Lack of Fresh Investments by Large Corporates
The primary reason behind the moderation in bank credit growth to industries is the lack of fresh investments by large corporates. Private sector investments have been sluggish, resulting in reduced borrowing from banks. The Chief Economist of Bank of Baroda, Madan Sabnavis, explains that the issue lies with the demand for loans, as there are no significant obstacles in terms of non-performing assets (NPAs) or banks’ willingness to lend. In fact, fresh investments take time to materialize, even after loan sanctions.
2. Scattered Investments and Cash Utilization
The investments that are currently taking place in the Indian economy are scattered, with only a few industries making substantial investments. Consequently, when large corporates refrain from investing, their borrowing from banks decreases. Instead, corporates are utilizing their cash balances or exploring domestic and foreign markets to raise funds for their investment needs. This trend further contributes to the slowdown in bank credit growth to industries.
3. Uncertainty Surrounding Lok Sabha Elections
Bankers anticipate that loan demand from corporates will remain subdued until the upcoming Lok Sabha elections. Even though there is an expectation of the current government’s re-election, companies are cautious and prefer to observe the policies and benefits that the new government might bring. This uncertainty leads to a delay in investment decisions, affecting the demand for bank credit.
Sector-Specific Impact
1. Infrastructure Sector
The infrastructure sector, which holds a significant share of 35% in overall bank loans to industry, has also experienced a decline in credit growth. In November 2023, credit to the infrastructure sector grew by only 2.1% compared to 11.1% growth in the same period last year. Within the infrastructure segment, credit to roads witnessed a substantial decline from 14% to 6.4%, while loans to the power sector degrew by 0.4%. These figures indicate the impact of corporate investment stagnation on infrastructure development.
2. Medium Industries
Credit growth to medium industries has significantly moderated, with a growth rate of 12% in November 2023 compared to 28% in the previous year. This slowdown can be attributed to the cautious approach adopted by medium-sized companies in the face of uncertain economic conditions and reduced corporate investments.
3. Micro and Small Industries
Loans to micro and small industries have shown relative resilience, registering a growth rate of 17.2% in November 2023 compared to 19.5% in the previous year. This segment receives priority sector lending, leading banks to focus more on providing credit to micro and small enterprises to meet regulatory requirements. However, it is important to monitor the long-term impact of corporate investment stagnation on this sector.
Conclusion
The sluggish growth in bank credit to industries, driven by a lack of fresh investments and weak demand for loans, has significant implications for the Indian economy. Large corporates are the primary contributors to this slowdown, with scattered investments and cash utilization becoming prevalent. The uncertainty surrounding the upcoming Lok Sabha elections further dampens loan demand from corporates. The infrastructure sector, medium industries, and micro and small industries are all experiencing the effects of corporate investment stagnation to varying degrees. It is crucial for policymakers and banks to address these challenges and create an environment conducive to promoting investments and stimulating loan demand.