Dissecting the credit crunch in India

The media is rife with reports on credit crunch in India. There are assertions from industry that banks are not lending, rates are high etc but banks (esp public sector banks) say they are lending and the main problem is finding right projects.

I was just looking at the recent Monetary policy statement from RBI and it gives some interesting statistics on credit markets in India.

Table 5: Annual Variations in Banking Indicators (%)
Item	January 4, 2008 (y-o-y)	January 2, 2009 (y-o-y)
Aggregate Deposits	25.1	21.2
Bank Credit	21.4	24.0
Non-food Bank Credit	22.0	23.9
Total flow of Resources from Banks to the Commercial Sector	21.7	23.4
SLR Investments	25.8	19.2
Incremental Credit-Deposit Ratio	63.1	81.4

The credit flow from banks has increased in current period. Moreover, Credit-Deposit ratio has increased from 63.1 to 81.4 indicating banks are more than willing to deploy the deposits towards credit. The growth in SLR investments have declined compared to previous time-period, which is also contrary to the statements pointed elsewhere(which says banks are deploying all the deposits towards SLR and not credit)

Table 6: Flow of Financial Resources to the Commercial Sector
(Rs. crore)
Item	2007-08	2008-09
	(Up to January  4, 2008	(Up to January 2, 2009)
From Banks	2,24,921	2,93,243
From Other Sources*	2,74,563	1,91,470
Total Resources	4,99,484	4,84,713
* Includes borrowings from financial institutions and NBFCs as well as resources mobilised from the capital market and by way of ECBs, FCCBs, ADRs/GDRs, FDI and short-term credit as per the latest available data, adjusted for double counting

This table explains the actual situation. It is not banks that are leading to the crunch but other sources like equity markets, ECBs etc. If we see flow from banks has increased but the flows from others have fallen leading to an overall slowdown in flow to commercial sector.  Dr. Subba Rao had mentioned this concern in his first statement as RBI Governor:

The equity and the forex markets provide the channels through which the global crisis can spread to the Indian system. The other three segments of the financial markets – money, debt and credit markets – could be impacted indirectly. Risk aversion, deleveraging and frozen money markets have not only raised the cost of funds for Indian corporates but also its availability in the international markets. This will mean additional demand for domestic bank credit in the near term.

He even provides an update on Table 6 in his press statement after the monetary policy:

The demand for credit from the banking sector has increased as other sources of funds to the commercial sector have shrunk. Available information (as on January 23, 2009) suggests that the total flow of resources to the commercial sector from all sources, estimated at about Rs.4,85,000 crore during the fiscal year 2008-09 so far,has been lower than about Rs.4,99,000 crore in the corresponding period of the previous year.  While bank credit has substituted for the shortfall in other sources of funds to some extent, a complete substitution has so far not taken place.

The overall credit figures could be a misnomer as credit might be flowing to only a few sectors and not to others. So, I checked sectoral allocation of credit (the table is given in Governor’s statement but a detailed categorisation is given here in Monetary Conditions Chapter of Macroeconomic outlook; Table 32)

% growth (year on year)	21-Dec-07	19-Dec-08
Non-food Gross Bank Credit (1 to 4)	21.8	24.8
1. Agriculture and Allied Activities	19.3	22.7
2. Industry (Small, Medium and Large)	24.9	30.2
Small Enterprises	35.6	7.4
Industry Types (includes SME)
Food Processing	30.2	17.6
Textiles	24	18.4
Paper & Paper Products	23.9	25.4
Petroleum, Coal Products & Nuclear Fuels	18.6	114.5
Chemicals and Chemical Products	13.7	28
Rubber, Plastic & their Products	18.8	34
Iron and Steel	31.8	24.7
Other Metal & Metal Products	9.3	34.8
Engineering	29	28.3
Vehicles, Vehicle Parts and Transport Equipments	37.6	28.3
Gems & Jewellery	14.2	13
Construction	37.3	57
Infrastructure	37.1	38.5
3. Personal Loans	15.9	14.6
Housing	14.6	8.8
Advances against Fixed Deposits	12.8	23.6
Credit Cards	45.3	69.6
Education	45.7	37
Consumer Durables	5.9	0.6
4. Services	24.8	27.6
Transport Operators	29.9	30.6
Professional & Other Services	34.3	55.6
Trade	17.8	19.7
Real Estate Loans	35.8	48.1
Non-Banking Financial Companies	59.6	40.1
Priority Sector	19.6	13

• Out of 30 categories in the list in 17 the growth is higher in the current period.
• The growth in credit is sharply higher to petroleum, coal and nuclear fuel industry. We don’t have more categorisation on how much credit has gone to which of the three, but it does confirm credit to this sector has increased in wake of sharp losses due to oil prices.
• Other  categories where credit has risen sharply is credit cards, construction, real estate (hello!! stop crying).
• The growth has increased marginally in few services sectors like Professional services, trade etc
• The categories where credit growth has declined sharply are SMEs, NBFC, Food Processing, Automobile, education , iron and steel etc. However, in none has the growth declined. It is just lower than  previous years growth rates.
• Despite sharp growth in credit card loans and advances against FDs, the growth in overall personal loans category is lower. The credit for consumer goods has declined to just 0.6%. This seems to be a case for lower demand. In these times, people understand there is no point being levered when you have so much uncertainty about jobs, business etc.
• In all though credit growth rates have slipped in some sectors, it is no where negative as it seems to be made out. Again, the data is available for December and may be the conditions have slipped further in Jan

Another interesting table is who is lending (Table 8 here)

 

Growth	4-Jan-08	2 Jan 09
Public Sector Banks	19.8	28.6
Foreign Banks	30.7	16.9
Private Sector Banks	24.2	11.8
Scheduled Commercial Banks	21.4	24

This also explains the story partly. The growth has declined in both foreign and private banks and increased in public sector banks.

How about interest rates being charged?

 

Benchmark Prime Lending Rate (BPLR)	Oct-08	Jan-09
Public Sector Banks	13.75-14.00	12.00-12.50
Private Sector Banks	15.25-17.25	14.75-16.75
Foreign Banks	14.25-15.50	14.25-15.50

 
This is also an interesting set of numbers. Despite such massive rate cuts (350 bps in Repo), only Public Sector Banks seem to have lowered the rates. In Foreign Banks , rates are unchanged and private sector banks have lowered it by just 50 bps. Why should this be? Dr. Subba Rao explains:

The interest rate response to monetary policy easing has been faster in the money and bond markets as compared to the credit market because of several structural factors.

• First, the administered interest rate structure on small savings could potentially constrain the reduction in deposit rates below some threshold.
• Second, a substantial portion of bank deposits is mobilised at fixed interest rates with an asymmetric contractual relationship.
• Third, competition among banks for wholesale deposits for meeting the higher credit demand in the upswing leads to an increase in the cost of funds.
• Fourth, linkage of concessional lending rates to banks’ BPLRs makes overall lending rates less flexible.
• Fifth, persistence of the large market borrowing programme of the government hardens interest rate expectations.
• Sixth, with increase in risk aversion, lending rates tend to be high even during a period with falling credit demand. From the real economy perspective, however, for monetary policy to have demand inducing effects, lending rates will have to come down.

This explains why rates are not really coming down as per expectations. Out of the 56 reasons, I would guess it is 6th point which is the most important. In this time of uncertainty banks have to be prudent in lending.  We can’t have a situation where in order to push credit we end up having huge non-performing loans on balance sheets. Moreover, banks must be finding it tough to recover existing loans itself. 

 To sum up, it is not really credit crunch but what looks like a capital market crunch with firms not being able to get financial resources from latter. Latter source was available in plenty before the crisis. The banks have responded well and have tried to increase lending in these trying times. However, bulk of the increase seems to be coming from PSBs who have also lowered rates sharper than others. The sectoral allocation of credit shows that though growth has slipped in a  few key sectors it is no where negative as is made out to be. This is obviously looking at whatever data is available and may be the situation has changed since then.

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