India infrastructure boost to lead credit growth

Edition 20, October 2010
Shubhreet K

The Reserve Bank of India estimates a gross domestic profit (GDP) growth of 8.5 percent in 2010-11. The unprecedented growth estimate is largely fueled by investments. Sameer Narang, an economist with HDFC Securities thinks this will have a big impact on the investment trends in Indian economy and on the Indian banking and financial industry itself.
In the last three years, investments in the Indian economy were over $1.3 trillion. Pri- vate corporate investments are fueling the growth in the Indian economy.


“Even though retail participation is high, the real boost to investment is coming from corporates specially the infrastructure sector. Bank credit to infrastructure has increased by 44 percent,” explains Narang.

Infrastructure credit constitutes 13.1 percent of bank credit in the Indian economy. With the government pushing for infrastruc- ture projects in the country, banks will continue to witness strong demand for loans to fund investments in the infrastructure space. The growth in loans for telecom, auto ancillaries, steel, metal products, cement, paper, sugar, media and airlines is also expected to continue.

While there are signs of credit pick-up in all sectors, a large proportion of demand is from the infrastructure sector. According to Narang: “The investment potential in the infrastructure space provides a big opportunity for banks. Loans to infrastructure segments such as power, roads, telecom etc are leading the credit growth in the economy and will continue to rise in the future.”

There is a broad acceptance that infrastructure development has a direct bearing on sustainability of economic growth and future development. “Banks will be concerned about managing asset liabilities as there are risks associated with funding infrastructure projects,” adds Narang. “Banks need to have deep pockets to support such projects but the rewards are big as well and they have a lot to gain from it. There is also a risk of concentration on one sector and that is where regulations become an important factor.”

Private corporate investments increased to 15.9 percent of GDP in 2007-2008 from 6.8 percent of GDP in 2003-04. Narang says: “Banks will gain directly from such investments as it will boost credit growth that translates into more business for banks. However, it is PSU banks that are keener on funding large-scale projects and are focusing more on corporate loans. Private banks have been focusing more on their retail business over the last few years.”

The credit growth in other sectors is also very stable although a regulatory push as the foreign direct investment and FII inflows are restricted to a limited number of sectors. The investments in industrial sectors are clearly much higher than investments in other sectors such agriculture and services. Narang says: “There is demand from the housing sector as well even though the sec- tor has gone through a difficult period. Some more sectors need to be opened up for FDI such as retail, real estate, etc.”