ICRA expects the overall year on year (YoY) credit growth from the banking sector and debt capital markets to slow down to 9-10% in FY2019 from 10.7% for FY2018 and 12.9% as on September 2018. This dip in growth is expected to be driven by a slowdown in YoY growth in outstanding volumes of corporate bonds, commercial paper (CP) as well as a moderation in bank credit growth.
Rising interest rates have led to a YoY de-growth of 26% in fresh bond issuance to Rs 2.5 lakh crore during H1 FY2019 (Rs 3.4 lakh crore in H1 FY2018). With this de-growth in bond issuances, the volume of bonds outstanding stood at Rs 284 million at end-September 2018, recording a YoY growth of 9.7% (14.0% as on March 31, 2018). However, a shift in credit demand to banks and a favourable base effect resulted in a strong YoY growth of 12.6% in bank credit as on September 28, 2018. Further, as investors shifted to short-term debt instruments, the CP outstanding volume rose to Rs. 5.5 lakh crore as on September 30, 2018, a YoY growth of 41.5%.
Karthik Srinivasan, Group Head, Financial Sector Rating, ICRA, said, ''With increased risk aversion for NBFCs and HFCs, the growth in bond and CP issuances is likely to moderate during H2 FY2019, pushing NBFCs and HFCs to scale down their credit growth.''
NBFCs (including HFCs) have accounted for ~55-60% of bond issuances during the last 2-3 years and approximately 41% of CPs outstanding as on September 30, 2018. We expect CP volumes to decline by atleast Rs 1 lakh crore during H2FY2019, which shall still translate in a YoY growth of 20-22% in CP outstanding volume for FY2019. Further, assuming bond issuances of Rs 3.0-3.4 lakh crore for H2 FY2019 (Rs 2.5 lakh crore in H1 FY2019 and Rs 3.4 lakh crore in H2 FY2018), the bond issuances are estimated to decline to Rs 5.5-5.9 lakh crore (YoY decline of 15-20%) during FY2019. With decline in bond issuance, the YoY growth in volume of bond outstanding shall decline to 7-8% for FY2019.
The systemic liquidity conditions have tightened, with a substantial deficit of Rs. 1.37 lakh crore on October 22, 2018, though deficit has declined thereafter. Anticipating the tight liquidity conditions, the Reserve Bank of India (RBI) had announced open market operations (OMO) purchases of Rs 360 billion for the month of October 2018 and Rs. 400 billion for November 2018 to infuse durable liquidity. With this, the overall OMO purchases would stand at Rs. 1.26 trillion (YTD November 2018). However, given the expectations of continued tightening in liquidity conditions, we expect the overall OMO purchase by RBI of at least Rs. 1.6 trillion by end-Q3 FY2019, as against OMO sales of Rs. 900 billion during FY2018. Further OMO announcement in Q4 FY2019 to be contingent on increase in currency with public, forex intervention and tolerance of RBI of temporary liquidity deficit.
Amid liquidity tightness, the deposit growth of banking system is expected to remain constrained and even with incremental deposit build-up of Rs 5.0-6.0 trillion during H2 FY2019 (Rs 3.3 trillion in H1 FY2019 and Rs 5.1 trillion in H2 FY2018), the deposit growth is expected to remain at 7-8% for FY2019 (6.7% for FY2018). The YoY bank credit growth remains strong at 12.9% as on September 28, 2018 partially supported by a low base of H1FY2018. Assuming an incremental credit of Rs 4.5-5.4 trillion during H2 FY2019 (Rs 3.3 trillion in H1 FY2019 and Rs 6.7 trillion in H2 FY2018), the YoY bank credit is expected to moderate to 9-10% for FY2019. Capital constrains for Public sector banks (PSBs) and deposit constraints for private sector banks (PVBs) will continue to impact overall bank credit growth. Accordingly, the overall credit growth from all these three sources (CPs, bonds and banks) is expected to moderate to 9-10% for FY2019.
Amid risk aversion of domestic investors and tight liquidity conditions, the companies are increasingly seeking to raise funding through overseas borrowings, which is reflected in 62% YoY growth in ECB approvals to USD 16.5 billion for H1 FY2019 as compared to USD 10.2 billion during H1FY2018 and USD 28.9 billion during FY2018. The growth in approvals has been driven by RBI’s relaxation in ECB guidelines during April 2018, whereby it increased the all-in cost of ECBs, expanded list of eligible borrowers which included HFCs, apart from expanding the overall list of end-use for ECBs. With recent depreciation of INR, the investors' appetite for masala bonds has weakened and companies will have to raise borrowings in foreign currency. The aggregate funding cost of USD denominated ECBs continued to move up driven by increase in LIBOR rates, hedging costs and reducing USD liquidity.
''Despite these challenges, the overall costing still remains competitive vis a vis domestic source. Accordingly, we expect ECB approvals to pick up to USD 35.0-40.0 billion during FY2019 from USD 28.9 billion in FY2018; given the ongoing trends and various measures taken by RBI including USD 10.0 billion borrowing permitted to be undertaken by oil marketing companies,'' adds Srinivasan.
