Corporate Investment – Is there a turnaround.??

After years of decline, Corporate investment appears to be readying for a take-off as per a report released by RBI. Aggregate loan sanctioned by banks and financial institutions (FIs) during FY16 rose nearly 10% to Rs 95,000 crore. The figure had been steadily declining since FY10 when it stood at a staggering Rs 5.6 lakh crore.

Even though these are only sanctioned loans, it does have certain credibility for two reasons. One, after the exuberant investment conceived during FY09-11 and the resultant increase in NPAs, banks have become lot more cautious and undertaking stringent due diligence. Secondly, the loans are being sanctioned after 12% of the sanctioned amount has already been invested by the companies against only 7% during FY09-11 period. This money is coming from company’s own funds and implies greater seriousness among the companies themselves. Since these are loans for expansion/modernization or new projects, the benefits from these would come only after 2-4 years and companies would be projecting a demand pick up by then to absorb these capacities.

The other important feature of the trend is reduction in loans sanctioned for mega projects (above Rs 5,000 crore) whose share has come down to less than 6% from 12% in FY14 and as much as 58% in FY10. While mega projects may gain from economies of scale, these face greater hurdle in terms of environment & other clearances, land acquisition etc. In fact, the root cause of current NPAs in the banking sector is mega projects loans which account for maximum share of total bad loans. It may be recalled that RBI sometime back brought out a discussion paper on regulating large borrowers to reduce banking sector’s exposure to large borrowers. (Read more at – https://indiaeconomyandbusiness.com/2016/05/17/large-borrowers/). Smaller projects have a few other advantages such as lower gestation period (faster commissioning) and higher labour absorption rate having additional benefit to economy like India.

Two sectors that have shown maximum increase in share are Roads & Waterways and Mining. Quite clearly, they have gained from government’s efforts at developing roadways, clearing of stalled projects and auction of mining licenses. In terms of longer term trend, Construction and Metals sector have seen their combined share come down from 30% in FY10 to less than 4% now. Other than bank loan sanctions, there is a substantial increase in funds mobilized through other sources also such as private placement of debt, FDI and ECB. The three together have recorded an increase of over 15%.

(Image courtesy of meepoohfoto at FreeDigitalPhotos.net)

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