SBI predicts credit growth rebound as working capital demand rises

The credit growth of Indian banks, which had slowed in recent quarters, is likely to pick up as companies increase their use of funds for routine business expenses, according to a report by SBI.

The report noted that the recent slowdown in demand for bank loans is projected to reverse, mainly due to a surge in sector-wide IPO fundraising. As companies put these resources to use, demand for bank loans is expected to rise in the upcoming quarters.

Working capital utilization signals recovery

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Companies across various sectors have begun increasing their working capital utilization, an early sign of strengthening loan demand. Historical evidence suggests that IPO collections and overall credit growth do not have a one-to-one relationship. Significantly, years with elevated IPO collections have often coincided with slower lending growth.

Sector-wise data confirms this trend. Industries such as finance, automobiles, pharmaceuticals, telecom, consumer durables, and infrastructure have seen muted credit expansion during years of high IPO fundraising. Much of the funds raised is typically channeled into expansion, capital expenditure, or debt repayment, limiting near-term borrowing needs.

The report, however, identifies early signs of a rebound in credit growth.

Rising Business Activity Fuels Loan Demand

Strong business momentum and higher production levels are increasing the need for financing across raw materials, inventories, supply-chain operations, and other operational expenses.

With the bulk of internal resources and IPO funds already utilized, companies are drawing on banks for fresh funds.

Robust GDP growth has maintained steady economic momentum, and heightened business activity is naturally pushing companies to seek additional financing, likely fueling a recovery in credit growth in the months ahead.

The RBI is said to continue proactive liquidity management to guarantee that banks have sufficient funds to meet the rising loan demand. With adequate liquidity in the banking system, borrowing conditions are likely to remain stable.

According to the report, fading IPO-related effects, growing working capital demands, and ongoing economic stability suggest that credit expansion in India is projected to pick up momentum soon.