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 (%)


January 4, 2008

January 2, 2009

Aggregate Deposits



Bank Credit



Non-food Bank Credit



Total flow of Resources from
Banks to the Commercial Sector



SLR Investments



Incremental Credit-Deposit Ratio



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)





(Up to January
 4, 2008

(Up to January
2, 2009)

From Banks



From Other Sources*



Total Resources



* 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)
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.


9 Responses to “Dissecting the credit crunch in India”

  1. Interest Rates » Dissecting the credit crunch in India « Mostly Economics Says:

    […] Read the rest of this great post here […]

  2. Asset Reconstruction Says:

    Its interesting to read data charts above mentioned the current flow of financial transactions through banks. I don’t think banks are in a bad conditions .

  3. RBI’s third quarter review of monetary policy - status quo « Mostly Economics Says:

    […] I have analysed the credit market situation in India Possibly related posts: (automatically generated)RBI cuts […]

  4. Dissecting the credit crunch in India | No Brainer Profits Says:

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  6. What Should You GoSee? » Blog Archive » World Economy To Shrink in 2009 For the 1st Time Since Ww2 « Socio … Says:

    […] Dissecting the credit crunch in India « Mostly Economics […]

  7. Bill Cash Says:

    I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

  8. ramdevbajaj Says:

    excellent analysis.situation is not bad as is made out in the newspapers and media.

  9. Dissecting the credit crunch in India -II « Mostly Economics Says:

    […] in India -II By Amol Agrawal RBI released its monetary policy for 2009-10. Just like my previous post, I was interested to see the credit market […]

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