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.