Could Growing Cash With Corporates Limit Banks' Credit Growth In 2024?

Indian corporate giants are sitting on a mountain of cash, which could fuel the next leg of a capex boom, but may drag credit growth as the need for corporate lending lowers.

Calendar year 2023 saw increased investor focus towards public sector undertaking stocks, due to a huge stream of order wins along with government-led capital expenditure—with defence and railways being the key focus. This led to further speculation over the long awaited follow-up from the private sector counterpart.

Rising cash balances in the top 100 companies by market cap has raised hopes for a sustained uptick in private capital expenditure.

Cash balances of companies included in the Nifty 100 (ex-financials and IT) have grown by over 62% over the past three years, rising for 13 of 17 sectors, Bloomberg data showed.

Companies with primary activities involved in the oil, gas and consumable fuels sector have seen the biggest surge in their cash balances, rising to over fourfold the initial levels three years ago.

Reliance Industries Ltd. was the biggest gainer in this category, with an addition of nearly Rs 53,000 crore.

Constituents with businesses involved in the chemicals and construction material space were two of the four sectors with a decline in their cash balance. Those in the metal and mining sector and services sector recorded a marginal decline.

"Around 35-45% announcements for capacity expansion were from the chemicals space during the post-Covid period. However, the profitability was impacted by the global scenario," Teresa John, deputy head of research and lead economist at Nirmal Bang Securities Pvt., said about the diminishing cash balances within the chemical sector companies.

"Very few sectors are now overleveraged in the listed as well as the unlisted space, with companies focusing on deleveraging their balance sheets in the post-Covid period. With interest payments coming down, cash balances have gone up," she said.

Thanks to strong balance sheets, a capex pick-up is unlikely to be led by bank borrowings as long as the demand for capex holds up, John said.

With a full treasury and deleveraged balance sheets, corporate giants are set to deliver a long-awaited uptick in capital expenditure. However, with a reduced need for borrowings, India's credit growth prospects may be hampered.

A borrowing requirement may, however, emerge from companies not included in the large-cap space, according to Rajiv Batra, head of Asia Pacific ex Japan/China equities strategies at JPMorgan.

Companies which form the supply chain for the large-cap players, who may not have high cash balances, might still have a need to borrow from financial institutions, he said.

"Rather than just focusing on few cash-rich corporates who can drive the private capex cycle, we have to look into the broader sleeves who will also grow along with them, will have borrowing needs, and this will be the audience who will be tapping into private bank and generate growth," Batra said.

Lending in the retail segment comes at a lucrative yield for the banking sector at 12-16%, as compared with 7-8% for the corporate sector, according to Vinay Jaising, managing director at JM Financial Services Ltd.

"I think the NIMs will reduce further because your book would edge more towards the corporate [sector]. The quality of the book may be better, so if people want to pay better for a higher quality book—those are the ones that would buy more on the financial sector. But, incrementally, you would see the corporate capex improve and that's the space where you need to focus on," he said.