Indian businesses' demand for credit last year grew at its fastest rate since the economic reforms of the 1990s, as the country's manufacturers expanded rapidly overseas and companies responded to rising domestic demand for services.
The Reserve Bank of India said in its annual policy statement that the sharp rise in credit growth partly reflected a continuing strong appetite for retail and consumer credit. But it added that the biggest boost came from accelerating capital demand from big businesses such as construction and manufacturing after several years of slack demand.
The bank said that borrowing by medium-sized and large Indian companies rose by Rs322bn ($7bn) between April 2004 and January this year, compared with only Rs17bn a year earlier.
“We've never seen these sorts of times before,” said Mr K V Kamath, managing director of ICICI Bank, the second-biggest in India. Indian businesses are implementing projects to expand capacity to the tune of about $45bn-$50bn, he added.
The RBI said much of the corporate demand for credit was fuelled by Indian companies seeking to finance overseas expansion. The demand was not only among suppliers of software and IT services, the bank said, but also medium-sized manufacturers, such as car-part makers, seeking acquisitions to increase their expertise and gain sales and marketing capabilities.
Non-food credit, which includes both retail and corporate borrowings, grew 26.5 per cent last year, against 18.4 per cent in the previous year its highest level in more than half a century, but for an aberrant year in the 1980s.
The credit boom comes alongside a burst in capital-raising on domestic markets, in which Indian companies are poised to raise record sums from initial public offerings.
An estimated Rs400bn worth of IPOs is to be offered this year compared with Rs214bn in the 12 months to March, says Prime Database in Delhi, which tracks the primary market.
The take-up of credit by Indian businesses last year replaces a meagre appetite for credit in the preceding three or four years. Companies were busy cleaning balance sheets during that time, improving productivity and disposing of non-core assets acquired a decade ago in an expansion binge.
Many companies now are in a position to consider expanding capacity once again. The investment boom was reflected by the RBI's buoyant forecast of economic growth for 2005-06, announced yesterday in its annual policy. The bank said real gross domestic product was set to grow about 7 per cent, after 6.9 per cent in 2004-05 and 8.4 per cent the year before.
The RBI said industrial output expanded 8.9 per cent last year, reflecting strong investment. The growth forecast came as the bank raised the short-term repo rate 25 basis points to 5 per cent but left its benchmark bank rate unchanged at 6 per cent reinforcing the view that its focus remains on sustaining the momentum of expansion.
But economists warned that rising inflation could trigger monetary tightening this year.
Dr Y. Venugopal Reddy, RBI governor, said higher oil prices posed the biggest threat to inflation, leading to costlier credit “but while external factors may be relevant [in the interest rate debate] they are not dominant”.
“The important factors are domestic ones and we believe we have the tools to manage them,” he said, adding that India's high foreign exchange reserves and external trade that formed a low proportion of GDP were “cushions against global risks”.
