With average capacity utilisation now touching 76 per cent, Indian companies are going back to the drawing board to add capacity but the plans to build new factories and plants are still some months away.
Illustration: Dominic Xavier/Rediff.com
Banks are expecting double-digit growth rates in commercial credit in the next few quarters because companies are raising funds.
With average capacity utilisation now touching 76 per cent, Indian companies are going back to the drawing board to add capacity but the plans to build new factories and plants are still some months away, say chief executive officers (CEOs).
Besides working capital loans, banks are likely to be busy with refinancing old loans.
Statistics collated by Business Standard show commercial credit is growing in double digits since 2018 after single-digit growth between April 2016 and December 2017 on demand for working capital and government-funded infrastructure projects.
In fiscal 2020, it is expected to grow at more than 10 per cent.
It could have been higher but for the bankruptcy cases, where companies do not spend as much on acquisition as they would on setting up greenfield capacity.
Large steel and cement companies raised their capacity by acquiring rivals and are not looking at setting up plants in the near future.
“Tata Steel acquired new capacity by buying Bhushan Steel and Usha Martin while JSW Steel is set to acquire Bhushan Power and Steel. Vedanta has bought Electrosteel Steel.
"In this backdrop, new greenfield plants are still a few months away,” said the head of a large steel firm.
UltraTech, India’s largest cement company, is busy consolidating operations after taking over Binani Cement in the last fiscal year, said an official.
Capacity expansion by auto and two-wheeler majors is also not on the cards, say industry representatives as rural sales are seeing a slow rate of growth.
Bankers say the demand for short-term loans is rising in the corporate sector but not on big-ticket corporate loans.
Sidharth Rath, managing director and chief executive, SBM Bank (India), said as capacity utilisation in manufacturing was going up, it was pushing up demand for short-term credit like working capital and trade finance.
"If the trend continues next year, companies will go in for capacity expansion, which would need funding - both equity and long-term funds. The latter will give rise to term loans,” he said.
V G Kannan, CEO of the Indian Banks’ Association, said overall credit should grow at 15-16 per cent in 2019-20 but robust expansion in the growth of corporate loans would be difficult.
“The only thing that is being financed is government-funded projects like in the road and power sectors.
"Also, with the repayment of dues in some big stressed cases like Essar Steel, the existing loan book of some banks may shrink.
"Projects which are conceived now will translate into credit demand one or two years later.
"The rule to raise 25 per cent of incremental money from the capital market (bonds and short-term paper) will keep loan growth muted,” Kannan said.
Parthasarathy Mukherjee, Lakshmi Vilas Bank managing director and CEO, said: “Mostly we are noticing demand for refinancing and accounts moving from one bank to another.
"Growth is not happening. Neither capex nor fresh investment is being seen. Corporate credit is relatively muted."
With inputs from T E Narasimhan