Bank loans

Rising commodity prices boost demand for bank loans

The spike in commodity prices following the Russian-Ukrainian war may have been a boon for Indian banks, as lenders are now seeing increased demand for working capital. The rising cost of raw materials has led companies to use their working capital limits and even seek top-ups, according to bankers FE spoke to.

Credit drawdown improved in FY22, gradually returning to normal after two waves of the pandemic and despite a relatively milder third wave. Non-food credit extended by banks increased by 9.7% year on year (year-on-year) as of March 25, according to data released by the Reserve Bank of India. Industrial credit growth fell to 6.5% in February 2022 from 1% a year ago.

Rajneesh Karnatak, executive director of Union Bank of India, said working capital limits that had been sitting idle are now being used. “Companies that have used their limits have also come in looking for additional working capital as the cost of production has increased. Availability has increased by about 10%,” he said. This trend has emerged over the past one or two months as the Covid situation has improved and the Russia-Ukraine situation has led to price increases, Karnatak said, adding that rising costs have led to better demand in sectors such as steel, textiles, pharmaceuticals, chemicals. and thermal power projects.

In February 2022, State Bank of India Chairman Dinesh Khara said that the unused portion of the bank’s working capital loans had fallen to around 43% from 52% in September 2021.

Crude oil prices hit a 14-year high of $133 a barrel in the first week of March, and prices have been volatile since then, hovering around $110 a barrel. Base metal prices, as measured by Bloomberg’s Base Metals Spot Index, rose 25% between September 2021 and March 2022.

“Higher commodity prices are definitely playing a role in the improved credit growth you’re seeing. Utilization is improving and there is also more demand for LCs (letters of credit) from manufacturers,” said a senior banker at a mid-sized private bank.

Large industrial credit shrugged off a long period of contraction and below-average growth to grow 0.5% in February 2022, driven by engineering, chemicals, food processing, leather, rubber and plastic products. According to the RBI, infrastructure credit, which accounts for 38% of total industrial credit, grew by 11.9% in February 2022, driven by the road and power sectors and the surge in government investment.

In its April 2022 Monetary Policy Report, the RBI said firming global crude oil prices were the main factor impacting prices of industrial inputs such as naphtha, jet fuel, bitumen, petroleum coke and fuel oil. “They also contributed to double-digit inflation for high-speed diesel, which in turn drove up agricultural input price inflation. Other contributing factors include fertilizer prices which rose slightly in sympathy with the international prices, and prices of some non-food items which remained in the double digits – raw cotton and oilseeds,” the report said.The price of electricity – a key input in industrial and agricultural inputs – also fell sharply increased in the second half of FY22 in line with the recovery in demand.