FE Editorial: Lend a hand, now

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: The central bank’s clear signal that it intends to tighten monetary policy is already showing on bank credit off-take. For the first time in 12 years, credit growth dropped to a single-digit level, at 9.66% on a year-on-year basis through October 23, against 10.75% recorded up to October 9. Playing safe, banks have parked a record

Rs 1,33,295 crore with RBI through the reverse repo window that is used to suck out excess liquidity from the system. This will have far-reaching consequences on consumer demand and expansion plans of companies at a time when we are seeing some recovery in certain sectors. Requirements for working capital have not yet picked up, indicating lack of credit demand from the manufacturing sector, which accounts for the bulk of credit off-take. Anticipating interest rates to go up, companies drawing up expansion plans are now tapping non-bank sources such as commercial paper and initial public offerings. These sources, which are cheaper than borrowing from banks, account for about 70% of India Inc’s long-term fund requirements. Companies are also finding global market more lucrative to borrow from as the credit default spread has come down to the same level as it was before the collapse of Lehman Brothers. Also, one of the reasons for the low credit off-take is the lower demand of funds from oil and fertiliser companies. In fact, last year these companies had borrowed heavily with the government deferring subsidy payments on fuel prices. While there were signs of an increase in the disbursal of loans sanctioned by banks, companies are now deferring disbursement of their sanctioned loans, anticipating interest rates to go up, which will be a drag on their profit margins.