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Is there `real' demand for industrial credit?

Rukmani Vishwanath

Mumbai , April 3

BANK credit has been rising steadily over the past couple of months and yet bankers and analysts are divided on whether it is indicative of any `real' pick-up in industrial credit.

While on the one hand top bankers have been talking about visible signs of credit-offtake, in direct contradiction is the huge overhang of liquidity in the system.

So the question that is looming large in the minds of analysts and industry watchers, is whether the current data is indicative of a sustainable credit growth?

As per the latest RBI statistics, there has been a whopping Rs 16,253 crore growth in gross bank credit during the fortnight ended March 19, 2003.

As on this date, the total outstanding bank credit, stands at Rs 8,35,382 crore.

In fact, bank credit, particularly non-food credit, has been recording significant surges since late January this year.

Bankers generally admit that `numbers alone' can hardly be perceived as a real indicator of a pick-up in corporate credit.

"If there was really industrial off-take, why are the yields in the domestic debt market still softening? Shouldn't the interest rates then start to harden?" asked an analyst with a foreign bank.

"The very fact that there is such a huge liquidity overhang in the system should in itself raise questions about why banks are parking their funds in the bond markets if there is real credit demand," he added.

In the declining interest rate regime of the past couple of years, the corporate bonds market has emerged as a cheaper financing alternative for the industry.

Therefore, even today most companies prefer to raise their resources at finer rates from the market, than having to go to a bank for funds.

So how does one explain these spurts in the figures indicating in credit growth?

At this point, some bankers feel, it is an open secret, that most of the growth in credit is largely due to retail-credit off-take.

Most banks have become extremely aggressive in pushing housing loans and other retail loans to consumers over the past one and a half years. There are concerns that some are actually deploying this credit lower than their cost of funds.

Another factor that bolsters the data is also the lending of short-term advances to corporates, which keep coming back into the system, analysts contend.

"Most banks want to prop up their advances. In a scenario where there is hardly any corporate credit off-take, the customer is king and can dictate terms. In many cases they borrow for short durations, like 3-6 months, etc. This money finds its way back into the system and gets reflected in the figures," admitted a banker.

Despite all this, one cannot ignore that top bankers have been saying that there have been expressions of interest for working capital loans from the power and Infrastructure sector, said an analyst.

"When this is viewed in the context of the 10.4 per cent GDP growth recorded during the third quarter, which has been attributed in part to industrial recovery and growth in the manufacturing sector, it seems probable that demand for credit may also be in the offing soon," he said.

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