FE Column: Enough credit where it is really due?

RBI?s monetary policy review claims that credit demand is reviving?non-food credit has expanded 19.5% year on year up to February 27, only a few notches lower than the 22% growth in the corresponding period last year.

Indeed year on year growth rates seem rosy across many sectors. The RBI document shows that credit growth was higher this year in agriculture (21.5%) and the priority sector (19.2%) or almost at par in industry (25.8%). Only the services sector seems to have suffered a hit with credit flows slowing down by close to 10 percentage points to 19.2%.

But these growth rates based on cumulative year on year variations hide more than they reveal. One finds a drastically altered scenario if one calculates the increase in credit growth over the recent three months. Between February 27, 2009 and May 22, 2009, the increase in non-food gross bank credit was only Rs 65,565 crore. This is 42.8% lower than the Rs 114,636 crore disbursed in the corresponding period last year.

Numbers for the three months between February and May also show that the central banks? claims of a pickup in credit was only visible in the agriculture and services sectors, where the offtake picked up by 39.2% and 30.9% respectively. In sharp contrast, the offtake to industry declined to just Rs 542 crore compared to the Rs 43,539 crore increase in the corresponding period last year, a staggering decline of 98.8%. Of course the reduction in the credit taken by the petroleum companies would account for a significant part of this fall. But the decline in credit to industry is still far too steep to be ignored.

In addition to industry, the personal loan segment has also taken a hit in credit flows, with the offtake declining to just Rs 2,090 crore in the most recent three months as compared to Rs 24,318 crore in the corresponding period last year. That?s a steep decline of 91.4%. Plus, offtake of housing loans slowed down by more than two-thirds to Rs 3,138 crore and credit card lending shrunk by Rs 1,949 crore as against an increase of Rs 7,252 crore in the corresponding period last year. Loans for consumer durables also declined by Rs 214 crore. One segment that showed some resilience was educational loans, where the offtake declined by a marginal 2.6% to Rs 858 crore.

A breakdown across different sectors of industry shows that decline is extensively spread across this segment. As suggested earlier, the highest fall was in the petrol/coal and nuclear fuel segments where the offtake shrunk by Rs 21,921 crore in the three months up to May 22 as against an increase of Rs 7,998 crore in the corresponding period last year.

The other important industrial sectors where credit offtake declined during this year include chemicals and chemical products (Rs 2,511 crore), vehicles and transport equipments (Rs 2,510 crore), textiles (Rs 1,998 crore), engineering (Rs 1,602 crore) and food processing (Rs 463 crore).

It is also of note that the credit availed by micro and small enterprises (in manufacturing and services) was Rs 30,067 crore. Though not strictly comparable, this is also lower than the Rs 34,999 crore of loans availed by the small enterprise segment in the corresponding period last year.

The only industrial sectors where the credit offtake remained positive in the recent three month period were rubber and plastics (Rs 136 crore), iron and steel (Rs 2,056 crore), other metals (Rs 393 crore) and gems and jewellery (Rs 619 crore). But even here, despite a positive trend, the growth of credit was much smaller than in the previous year in all sectors except gems and jewellery. In fact the gems and jewellery sector was the only industry sector that showed a higher increase in credit offtake in the current year, a healthy 30.9% increase over that of the previous year.

The only solace in this otherwise grim scenario is that the offtake of credit to the infrastructure sector has been encouraging. The Rs 17,898 crore increase in credit to infrastructure between February and May was a healthy 18.1% more than the Rs 15,160 crore of credit availed in the corresponding period last year.

A more detailed analysis also shows that the growth (albeit lower than earlier) in credit flows to services was mainly on account of the pickup in trade credit, which went up by Rs 3,855 crore, which was 8.7% higher than the offtake in the previous year. But credit to other sectors of the service segment like transporters, professionals, the real estate sector and non-banking financing companies have all in fact declined during the period. Unfortunately this extensive fall in credit offtake across the economy seems to have made no difference to the central bank, which has chosen status quo on the rates.

p.raghavan@expressindia.com