Dissecting the credit crunch in India -II

RBI released its monetary policy for 2009-10. Just like my previous post, I was interested to see the credit market data.

Unlike as seen in previous quarter, in this quarter banks have not replaced the non-bank source of funding. Non-bank has declined because of the financial stress.

Table 14: Flow of Financial Resources to the Commercial Sector  

(Rs. crore)

Item

2007-08

2008-09

From Banks

4,44,807

4,14,902

From Other Sources*

3,35,698

2,64,138

Total Resources

7,80,505

6,79,040

 

* 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. 

The Public Sector Banks are still the leading lenders (Table 11)  though growth has declined compared to previous quarter. The credit growth rate has dipped sharply in foreign and private banks compared to previous quarter. In all, the credit growth has slipped in this quarter.

 

Credit (y oy growth)

March 28 2008                             March 27 2009

Public Sector Banks

22.5

20.4

Foreign Banks

28.5

4.0

Private Sector Banks

19.9

10.9

Scheduled Commercial Banks* 

22.3

17.3

The rates have gone down compared to previous quarter when we saw no changes in loan rates in private and foreign banks. But then compared to rate cuts done by RBI, they still need to go lower.

Table 16: Reduction in Deposit and Lending Rates

(October 2008 – April 2009*)

(Basis points)

Bank Group

Deposit Rates

Lending Rates (BPLR)

Public Sector Banks

125-250

125-225

Private Sector Banks

75-200

100-125

Five Major Foreign Banks

100-200

0-100

BPLR
Oct – 08 Mar – 09 Apr – 09 Change (from Oct to Apr)
Public Sector Banks 13.75-14.75 11.50-14.00 11.50-13.50 125-225
Private Sector Banks 13.75-17.75 12.75-16.75 12.50-16.75 100-125
Five Major Foreign Banks    14.25-16.75 14.25-15.75 14.25-15.75 0-100

Sector-wise credit points credit has increased to agri, industry and real estate whereas has declined to NBFCs and Housing. Now, whether credit to housing has declined because of banks not giving home loans or because of low demand for houses? We need to research this. A bank group wise sectoral allocation is also given which suggests private banks have increases exposure to agri and real estate but has declined to industry. Public sector banks have increased allocation to industry and real estate. There is a more detailed analysis in the macrroeconomic report released before the monetary policy.

Sector
As on February 15, 2008   As on February 27, 2009  
  % share Variations % share Variations
  in total (per cent) in total (per cent)
Agriculture 9.2 16.4 13 21.5
Industry 45.2 25.9 52.5 25.8
Real Estate 3.1 26.7 8.5 61.4
Housing 7.3 12 4.7 7.5
NBFCs 5.7 48.6 6.6 41.7
Overall Credit 100 22 100 19.5

 To sum up, the credit conditions seems to have worsened after January 2009. The rates have declined but lending has not really picked up. However, the question still remains – whether credit decline is because banks are not lending (supply) or because people/corporates are  not borrowing (lack of demand). Should credit follow growth or growth follow credit? We usually see all financial variables as lead indicators and say if credit growth (along with other fin indicators) is picking, actual growth will also rise. However, my experience tells me the relation is far from clear. Infact, the fin indicators  hardly help predict any change in business cycle. Most rise in good times and fall in bad times. Most fin indicators failed to predict this global financial crisis and kept rising making everyone all the more complacent.

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