Corporate loans expected to revive credit growth for banks
By Vaibhav Aggarwal
Nov 24, 2007
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New Delhi: Struggling to achieve the retail loan targets, banks are now looking forward to corporate India to improve their balance sheets in the second half of this financial year.

The increase in various rates by the Reserve Bank of India (RBI) had serious consequences for the retail loan segment. Borrower’s fled the market and default increased as the interest rates became unbearable and the burden of a rising EMI became too much for the average borrower. The resulting slump made it difficult for the banks to match previous year’s record breaking credit growth.

Banks tried to counter the retail loan growth decline by offering discounts on home loan and other retail loan interest rates and associated processing fees during this festival season. This led to a small increase in retail loan off-take, but the results didn’t match the expectations. Home loans were the biggest dampeners, with the segment not taking off as expected, even after the festive discounts.

The banks were expecting correction in lending rates by RBI and kept their fingers crossed until October 31, when RBI refused to cut the interest rates any further and on the contrary increased the Cash Reserve Ratio (CRR) by 50 basis points to mop up the excess liquidity from the market. Banks, under a pressure to perform however, haven’t increased the interest rates despite a negative impact of the increase in CRR on their profit margins.

RBI has increased the CRR by 50 basis points five times since December 2006. Banks are now pinning their hopes on increase in credit demand by the corporate sector. In a research note analysts, Rajeev Varma and Veekesh Gandhi observed, “We are likely to see enhanced credit off-take relating to capex and infrastructure-related financing."

Small and medium sized companies are expected to generate a credit demand and push up the credit growth during the second half of this financial year. However, analysts believe that this credit growth will not match the 33.3 percent achieved in 2006-07. Chaitra Bhat, a banking analyst with Prime Broking said, "Credit growth will be significantly lower, despite cutting deposit rates banks have enough cash to fund credit growth for the rest of the year. Slowdown in some segments of retail won't impact much".

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