Lower capacity utilisation drags down corporate credit growth

Lower capacity utilisation and tepid volume growth has led to shrinking of corporate borrowings. According to RBI, as of March 3, the non-food credit growth has grown by a mere 4.8 per cent y-o-y to Rs 74.55 lakh crore.

The short lived note-ban effect has reduced demand for credit across the industries. The non-food credit, which usually stood at 45-50 percent of total credit, has now fallen below 40 per cent in 2016-17. As of January 20, lending to large industries fell 4.4 per cent y-o-y, medium enterprises fell by 10 per cent y-o-y and lending to small industries fell by 5.1 per cent y-o-y.

Going forward, rising commodity prices and increased government spending in infrastructure is expected to revive demand in the manufacturing sector. Capacity utilisation of manufacturing sector is around 72 per cent, which is still lower than previous quarters. The rising consumption superseding the short term liquidity crunch is expected to drive industrial demand.

Once the manufacturing sector reaches higher capacity utilisation it is expected to drive credit growth.