Textiles Sector Accounts For The Fourth Largest Share Of Banks' Credit Exposure

Market News

Textiles Sector Accounts For The Fourth Largest Share Of Banks' Credit Exposure

Out of the total credit deployed by the banking sector in industries, the domestic textiles sector has the fourth largest share at 7% (as of August 2016) after power, metals and roads sectors, says an ICRA rating agency report. The entities in the sector draw a bulk of their borrowings from the banking system, given the modest financial profile of most of the entities which restricts their ability to tap other avenues of credit.

In line with the high share of cotton-related textiles in the overall Indian textiles sector, the former accounts for almost 50% of the total bank credit outstanding in the sector. As per ICRA, the aggregate credit exposure of India's banks towards industries stood at around Rs 26 trillion (as of August 2016). Power, metals, roads and textiles are the largest four that account for 50% of the banks' gross credit deployed in industries.

Credit growth to the textiles sector is driven both by investment demand (term loans) as well as working capital loans, the share of both types of loans being at around 50:50 each. Bank credit to the sector had grown at a CAGR of 12% over the period FY2011 to FY2014, driven by capacity additions as well as increase in cotton prices.

However, bank credit to the sector has remained flat since FY2015 in view of lower working capital requirements following moderation in cotton prices, even as term loan disbursals have sustained pace tracking the continued capacity addition in the sector. The domestic cotton prices have increased by 50 per cent YoY during H1 FY2017. This is expected to push up the working capital requirements of the sector. While volume stocking up may reduce because of higher raw material prices, the overall credit requirements of the sector are expected to increase in the near term. This coupled with the steady investments expected towards capacity addition, given the fiscal incentives available under the Technology Upgradation Fund Scheme (TUFS) of the Government of India as well as from various state governments, should push up credit growth.

While the spinning sector had accounted for most of the investments in the sector in the past, the new investments are likely to be in the downstream sectors such as weaving and garmenting on account of the overhaul of the incentives structure with sops available to the spinning sector having been discontinued, while incentives for the downstream sector having been increased.

As per the ICRA report, the financial performance of the spinning sub-segment (the largest sub-segment of the textiles sector in terms of debt) had improved in FY2016, supported by relatively lower cotton prices which reduced the working capital requirements and thereby interest expenses. While the profitability metrics had improved in FY2016, because of a favourable raw material price scenario, the industry participants faced other challenges in the form of tepid demand growth in both the domestic as well as the export markets.

The financial performance of the other sub-segments such as weaving and garmenting had also remained steady in FY2016. Entities engaged in weaving typically maintain low inventory and are also able to pass on the changes in raw material costs to their customers, mitigating inventory risk.

The profitability of the entities engaged in garmenting, that are focused on the domestic market, has witnessed pressures over the last few years on account of slowing demand growth and increase in operating costs. Despite this trend, their debt coverage indicators remained steady in FY2016 by virtue of lower interest costs driven by lower raw material prices.

The profitability of garment exporters has remained volatile over the years in view of gains/ losses arising from fluctuations in foreign exchange rates. While their operating profit margins were stable in FY2016, interest subsidy from the government, improved the debt coverage indicators.