Data presented in the third quarter review of monetary policy gives some indications about whether bank lending is responding or not to policy. One of the features is substantial variation, both across sectors and banks. Overall credit of scheduled commercial banks picked by 3 percentage points to 24.8% in the period up to mid-December 2008, mainly on account of the increased lending to agriculture, industry and real estate. While credit to agriculture picked up by 3.4 percentage points to 22.7%, that to industry went up by 5.3 percentage points to 30.2% and that to the real estate by 12.3 percentage points to a stupendous 48.1%.
The acceleration in the growth of bank credit to real estate is in sharp contrast to previous trends when the steady increase in risk weight on commercial real estate exposure by banks from 100% to 150% over the 2005-06 period has forced down the growth of lending to the sector from a peak level of 80% in end March 2006 to 42% in end March 2007 and further to 19.8% at end March 2008. The consequence was a gradual reduction in the overall exposure to the sector.
The sudden pick up in real estate credit is also in sharp contrast to the credit flows to the relatively less risky housing segment which has slowed down by 5.8 percentage points to 8.8%, the lowest across all major sectors. This would seem to be a bit of a puzzle given that banks are generally seen as getting risk averse. Is this the government?s persuasion at work?
Interestingly, most of the higher lending has been provided by public sector banks (PSBs). PSBs have pushed up credit growth by almost 10 percentage points to 28.6%. Private and foreign banks, in contrast, have slowed down off take of credit by around half to 16.9% and 11.8% respectively, the lowest growth in recent years.
The importance of bank lending in times like these is clear. But PSBs favouring commercial real estate at a time the sector probably needs to go through a process of price and incentive correction is an odd statistic. The importance of the right signals become even more clear. Bank lending should respond to altered policy rates, not a policy of asking banks to lend more.
?p.raghavan@expressindia.com