Indian Economy: CLSA highlights what growth will remain contingent on | In brief

Corporate deleveraging continues; retail pick up strong in October 2020 Financials have rallied 25%-35% over the past 45 days and some banks are now at pre-Covid-19 multiples implying a normalisation of credit costs post second half of FY21 and a pick-up in growth. RBI’s Oct 2020 credit data indicates the fall in credit growth is being arrested with overall credit growth of 5% YoY and growth including bonds, CPS and ECBs at 4% YoY. Corporate deleveraging and cheap bonds and CP (Commercial Papers) funding are leading a contraction in corporate loans for banks but retail credit has picked-up on expected lines with MoM net growth of Rs 400 bn sequentially, implying a strong recovery. The key will be to see if current retail growth trends continue after the festive season. We expect a gradual credit growth recovery as corporate deleveraging continues and growth will remain contingent on a full pick-up in retail credit growth.

Corporate credit contracted: deleveraging and bond and CP substitution:

Industry credit contracted by 1.7% YoY with Rs 350 bn in contraction in Oct 2020 versus Sep 2020, with a fall in credit across most categories, notably telecom (down Rs 140 bn MoM and Rs 430 bn YTD since Mar 2020). CLSA believes the contraction is driven by corporate leveraging and also due to bonds/CP substitution. CPs outstanding was up Rs 180 bn MoM, and given low bond yields, corporate bonds outstanding also would have increased. Bond/CP substitution is also reflected in NBFCs bank borrowing dropping by Rs 240 bn in spite of retail pick-up.

The MSME book is up by just Rs60bn from the Feb 2020 level despite Rs 2 tn of ECLGS funding, indicating a lot of existing loan substitution by banks with ECLGS funding. For FY06-FY15, 40% of credit growth was driven by industrial credit growth. With the Capex cycle, this part of the credit growth contribution has come down to 5% over the past five years. Feedback from banks suggests that a Capex-cycle-driven credit recovery is unlikely.

Retail growth: strong pick up in Oct 2020; the key is for these trends to continue:

Reported retail credit growth was 9.3% YoY, similar to Sep 2020 but it masks the fact that net retail credit grew Rs 400 bn MoM which implies an 18% YoY growth run rate, and the past three months net retail credit grew Rs 800 bn implying a 12-13% YoY growth run rate. Similarly, mortgages grew 8% YoY, again similar to trends in Sep 2020. Mortgages grew by Rs 130 bn MoM, implying a 12% YoY run-rate over the past two months. Credit card receivables have picked up to Rs 1.1 tn as spending inched up and now credit card outstanding is similar to the Jan/Feb 2020 levels. Other retail loan growth, which also includes personal loans, picked up to +14% YoY. This is surprising given personal loan disbursements continue to be down materially relative pre-Covid-19 levels.

NBFCs have been a key growth driver for banks contributing 15%-20% of credit offtake post IL&FS, with record low bond/CP yields, the NBFC book contracted by Rs 240 bn MoM in Oct 2020. Overall Oct 2020 data corroborates strong disbursement trends indicated by banks. The key will be this trend sustaining beyond Nov 2020. Retail loan growth has driven 50% credit growth post FY15 and retail and bank lending to NBFCs have driven 70%-75% of the credit for banks. In absence of a credit driven capex cycle, overall credit growth will remain dependent upon retail growth.

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Expecting only a gradual pick-up in credit growth:

Financials have rallied 25%-35% over the past 45 days with some stocks factoring in a normalisation of credit costs and also a pick-up in growth. Sustainable PPOP growth in the high teens (pre-Covid-19 expectations) for the top-four private banks is contingent upon growth recovering to 8%-10% at the system level and 4%- 6% higher growth than the system for private banks driven by market share gains. CLSA expects a gradual recovery in credit growth to 8%/9.5% by FY22/FY23CL. With a weak Capex cycle, retail growth will need to recover to +15% YoY.