1. Decoding bank credit numbers

Decoding bank credit numbers

Single digit non-food credit growth since December 2014 does not augur well for the economy

By: | Updated: April 15, 2016 9:13 AM
RBI-reu-L According to the latest RBI data, the growth of gross non-food credit (NFC) outstanding for scheduled commercial banks (SCBs) stood at 9.9% as on February 19, 2016. (Reuters)

The Reserve Bank of India (RBI) effected a shift in its monetary policy stance on January 15, 2015, and since then the repo rate has been cut by 150 basis points (bps). The rate cut was expected to boost the investment demand by giving a push to credit growth. However, bank credit growth still remains sluggish.

According to the latest RBI data, the growth of gross non-food credit (NFC) outstanding for scheduled commercial banks (SCBs) stood at 9.9% as on February 19, 2016. The fact that NFC growth has remained in single digit since December 2014 does not augur well for an economy trying to recover from a slowdown.

A careful look at sectoral deployment of the new NFC (measured as yearly change in NFC outstanding) issued in 2015 presents a major shift in the driving force behind India’s economy. The accompanying table shows sectoral deployment of new NFC since 2012.

As can be seen, personal loans form the major share of the new NFC issued in 2015. This buttresses the point made in the Economic Survey, that the growth in the current financial year is largely driven by private domestic demand. However, what is worrying is the fact that the share of industries in the new loans issued has come down significantly, from 48% in 2012 to just 25% in 2015. The decline reflects the muted market sentiment, leading to slowdown in private investment demand and industrial growth, poor earnings growth of the corporate sector, and risk aversion on the part of the banks in the background of rising bad loans and governance-related issues.

The next question is, can private domestic demand lead our economy onto the recovery path? Global experience says that the boost in private demand may help the economy recover from a slowdown in initial years, but a sustainable recovery is very difficult to attain without a boost in investment demand. Hence, a recovery in our growth in the current financial year should be no reason to celebrate, and policy measures to boost the industrial sector should be implemented by the government before it gets too late and our economy slips into another bout of slowdown.

As far as industries are concerned, we need to see where the freshly issued loans have been deployed. The data shows that, in 2015, R1.36 lakh crore of new loans were issued to the industry, of which two sub-sectors—power and iron & steel—alone accounted for 58%. The share of iron & steel has jumped from just 9% in 2014 to nearly 19% in 2015. The share of power sector has surged from 21% in 2011 to 39% in 2015. This has happened despite the fact that iron & steel and power are two of the major contributors to the total stressed advances of SCBs. Global and domestic factors may further pose a serious threat to the already stressed banking assets. Not only have global commodity prices taken a plunge, the implementation of many infrastructure-related central sector projects is also running behind schedule. The 2015 March-end data shows that 17 out of 25 central projects related to steel and 63 out of 101 power-sector projects were already delayed.

The growth in bank credit has not only remained weak, but lopsided as well, which gets reflected in the skewed growth of the economy—which, at present, is largely driven by the boost in private consumption demand, whereas the investment demand continues to remain weak. For the economy to achieve 8% growth rate, it is important that the government brings in structural reforms in sectors such as power. The recently launched UDAY (Ujwal Discom Assurance Yojana) may help rescue the almost bankrupt state electricity retailers. Measures such as the passage of the GST Bill, faster clearance of delayed projects, and labour reforms may help a great deal in boosting investment demand.

The author is with the Indian Economic Service and is a research officer at the department of economic affairs, ministry of finance .

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