The RBI came out with its First Quarterly Review three days ago. Many, often erroneously, refer to it as RBI?s ?credit policy? document. This simply reflects our hangover from the days when much of the financial activity was controlled by the government. With greater liberalisation of the financial sector, corporatisation of public sector banks and the entry of competitive private banks, it is more and more difficult for the RBI to have a ?credit policy?. After all, who gets credit and at what rate is largely a market determined outcome and not something that the government can fully control, or direct. So, the quarterly review of the RBI should be read for what it states in its title?a review of the economy from one of its more reputed institutions.
The Review points out that though the financial sector has stabilised after the global mayhem, the real sector still seems to be adjusting. Two major fall-outs of the financial crisis were the credit squeeze faced by non-bank financial companies (NBFCs) and the housing sector. The housing sector has obvious implications for employment. NBFCs, on the other hand, are the major conduits for transferring resources from banks to small and medium enterprises (SMEs). When banks became nervous after the financial crisis hit India last year, NBFCs found it difficult to sustain the credit flow to the SMEs. This
too had a huge impact on employment. A large part of both the SME and housing employment is created in the informal sector and, given that 93% of the labour market is informal, this had a spiralling effect of reduced demand and, hence, growth in the economy.
The silver lining is that in industry, agriculture, and real estate, the credit flow has been maintained more or less at its previous year values. These are year on year figures compiled at the end of May and the crisis was yet to hit in May last year. Hence, these figures are reassuring. Banks had become very cautious immediately after the crisis; many perfectly worthwhile clients were unable to get credit even when they had a reputed and long credit history. The data seems to suggest that some correction has been made. This should certainly help India to get back on the growth path it was travelling on prior to the crisis. The question is when? The RBI feels that we have to wait for another year.
The real issue, however, is the situation in the other two sectors. The Review states that the credit flow to NBFCs has declined. Till May this year, the year on year flow of NBFC declined by 17%. For housing, this fall was much bigger?a whopping 59%. While the RBI can do very little to increase credit to these sectors, the recent announcement by the Centre of a 1% interest subsidy to low cost housing loans may have a positive impact in energising the housing sector. In December last year, the RBI had already opened up this possibility by announcing that the loans granted by banks to Housing Finance Corporation for on-lending for housing up to Rs 20 lakh per dwelling unit would be classified under loans for the priority sector.
According to the India Incomes and Savings Survey (IISS) conducted in 2007, 84%
of the finances for housing come from self financing and only 6% avail of bank loans. Interestingly, 65% then stated that they would be willing to take loans to build houses.
The lower interest on smaller housing loans and the RBI?s decision to view it as priority sector lending are steps in the right directions, especially if we are concerned with employment.
The economy is still in a process of recovery and the RBI has to contend with increasing private commercial credit at a time when the government has increased its deficit by quite a large amount. Much of this deficit will be for increased social spending. For some of this expenditure, the returns come after a long time; for others, they immediately increase the demand for consumable goods and services. Both tend to exert a positive pressure on prices and, hence, the cost of living indices. The RBI, therefore, has also to worry about inflation. It was, therefore, not surprising that there were no (monetary) rate changes by RBI.
The review talks about keeping a careful eye on the economy?s progress in the coming months. One only hopes that the erratic rainfall does not slow down India?s recovery.
The author is research associate, India Development Foundation