By Indraneel Pinnamshetty
The latest data from RBI pictures the growing demand for bank loans in the country. After a 15 month period, the annual year-on-year growth rate is slowing inching back to double-digit levels. According to the data, there has been a slow pick up in loans since late August. This slow growth culminated in recording a total bank credit rise of 9.9 percent in the fortnight ending December 22, 2017. “As the economy picks up, the demand for credit should go up, and there is enough supply to ensure that lack of credit is not in the way of supporting higher growth. So, the uptick in credit growth has already happened“, RBI governor Urjit Patel said at the post-policy media conference in early December’17.
Murky banks’ and corporates’ functioning
The recent growth in credit demand is a reversal of the dull credit environment that has plagued the economy throughout FY17. Incidentally, FY17 also marks the worst year for credit growth in the last 60 years.
Saddled with high bad debt and weak corporate demand, credit growth has struggled for a whole year, recording lowest levels of 5.08 percent in the financial year 2016-17 as against 10.7 percent in the preceding year. One primary factor for the vast dip was the growing corporate bond market from where companies could gain funds even for working capital at a time when they had been turned away by banks due to their over-leveraged balance sheets.
While demonetisation has helped bring in a substantial flow of bank deposits, it should be noted that the existing Rs 14 trillion bad loans was the major rub for any growth in the bank credit.
Need for credit rise
There is a prevalent view that the lack of credit growth in the banking sector is compensated by the ability to mobilise significant sums at lower interest rates in bond markets. If one buys such an argument, then the lack of credit growth shouldn’t worry any industry’s growth. However foreign portfolio investments in debt instruments are not a steady source of money as investors’ interest in these markets is extremely volatile. The performance of such markets was particularly poor in 2015 and 2016. Therefore, while an alternative bond market growth is appropriate, sole dependence on such markets instead of bank loans will attract unnecessary risks for the growing industrial activity in the country.
Loose grounds of NPAs
Much of the credit for growing assets goes to the recapitalisation of banks. While investors and industries celebrate the growing credit, there is a moral hazard in increasingly writing off bad loans to stabilise the system.
Repeated defaulting on loans by corporate groups and renewed recapitalisation by the banks will only attract more callous financial behaviour by the borrowers. The bad loan problem is largely confined to some 50 large corporate groups who indiscriminately borrow funds to divert them into purposes other than the projects for which the loans were granted. This moral hazard also extends to banks as they are now allowed to perform bad lending again with the belief that the government will protect them during the distress. Without rebuilding the banks and corporate India, NPAs are likely to stay for a long time and recapitalisation will only act as a temporary solution to what appears as a real growth in credit.
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