Boom time

New Delhi, Aug. 20: Bank credit has expanded by an unprecedented 30 per cent year-on-year and bankers expect the trend to continue.

Bankers said the increase in loans from June 2005 to June 2006 occurred despite the hardening of interest rates during the period. “There has been an industrial boom last year with both greenfield and brownfield projects being carried out. This has ensured high levels of bank credit growth,” said B.D. Narang, former chairman of Oriental Bank of Commerce.

Bank credit has risen by 31.8 per cent to Rs 15,46,585 crore as on July 21, 2006 from Rs 11,75,841 crore in the year-ago period, according to RBI data. Credit to the commercial sector, also called non-food credit, was Rs 15,13,529 crore against Rs 11,36,184 crore. This happened even though average interest rates for most companies went up by nearly 1-1.5 per cent, except for blue chip firms.

Bankers expect the future to remain bright despite chances of interest rates hardening further on the back of higher oil prices and inflation. “With increased demand for infrastructure development projects and the need for capacity expansion in automobile and cement sectors, credit offtake will continue to rise in the coming days,” said Narang.

“What we are witnessing is a trend where investment and industrial growth are not interest-rate-sensitive. Therefore, a small rise or fall of rates is not going to affect this trend,” he added. Bankers said with higher inflation, the real interest rates even in a hardening rate regime actually remains constant.

A recent study by industry chamber Assocham also shows that individual private banks were among the biggest beneficiaries of this credit growth trend. In the last quarter of 2005-06, Yes Bank reported a 126 per cent rise in credit, ICICI Bank 60 per cent and HDFC Bank 48 per cent.

Bankers said such results came about because of a better investment climate, improved business confidence, higher corporate growth and, of course, strong economy fundamentals. Last year, industry grew by 9.8 per cent while the manufacturing sector spurted by 10.9 per cent.

“A booming economy with GDP growing at 9.1 per cent in the last quarter and healthy growth in manufacturing and services sectors are the main factors contributing to the rise in credit offtake,” said Nagesh Kumar, director-general, RIS (Research and Information System for Developing Countries). “The outlook is essentially optimistic for investment mobilisation and growth in various sectors.”

Bankers said even companies which were initially borrowing only for working capital purposes, have for the last year or so been sourcing credit for capacity expansion.