Why industry is not keen to borrow despite high demand

New Delhi: Loans to sectors driving consumption have shown significant increase but credit growth to the industry has declined — showing absence of new investment in the country's manufacturing and infrastructure sectors, latest data has shown.

Lending to the services sector, which accounts for nearly 60% of the economy, rose at 12.1% year-on-year in August. Personal loans rose 18.1% during the month to Rs 14.5 lakh crore up from Rs 12.3 lakh crore in the same month a year ago, data from RBI showed.

Loans to the housing sector, for purchasing vehicles and for meeting credit card outstanding registered double-digit growth in August, highlighting the importance of consumption which is providing a shield to the economy against the backdrop of sluggish investment demand.

The data showed credit growth to industry declined 0.2%, the first fall in a decade. Credit growth to industry in August was Rs 26.18 lakh crore compared to Rs 26.2 lakh crore in August 2015. Under priority sector, loan to the manufacturing sector declined 3.7% in August compared to last year.

Bankers said there were no new proposals from the power sector, which had driven demand. While the road sector is showing an improvement in terms of awards, sectors such as cement has excess capacity, resulting in low demand for debt. Also, the global commodity prices have put pressure on metal with several companies reeling under stress, especially in the steel sector.

"Currently, several major companies are de-leveraging and there is little appetite for loans," said a senior executive at a leading bank. Economists said demand for credit has been positive from agriculture and the retail segment but muted from the industry. They said the service sector, trade and financial services and government spending, which are not dependent on bank credit, were posting robust growth.

"There is less demand for credit because industry is grappling with surplus capacity. Right now average capacity utilisation is 70-72%. Unless it is 80% there will not be any fresh demand for loans. Banks are reluctant to lend to the industry and infrastructure due NPA problem be it textile, mining, infrastructure," said Madan Sabnavis, chief economist at Care ratings agency. He said these sectors were moving to commercial paper and the corporate debt market to meet working capital needs.

Sabnavis said the contraction of credit to industry is not a cause for worry now but will be a key factor when demand rises next year. "When there is a demand for credit and banks are not able to meet it then it would be a worry. Balance sheets of banks need to be cleaned up to ensure that they are ready to lend when demand picks up," he said. Some economists said the sharp increase in FDI may have prompted domestic investors to go slow. "Demand constraint is hurting expansion in the country. The fear of foreign competition may be discouraging domestic private investment. This may be a major factor that needs re-examination," said N R Bhanumurthy, professor at the Institute of Economic Growth.