How is India financing its growth?

RBI’s quarterly review of Macroeconomic and Monetary Developments deserves far more coverage than it gets. It has so much information and useful data and it is by far the best review of Indian economy on a quarterly basis.  One reason could be it is just released before the monetary policy and hence loses its relevance as focus moves to monetary policy.

For instance, those who read Second Quarter Review 2010-11, a rate hike next day became imminent. The review was hawkish on inflation.  RBI believed growth dynamics were in place despite recent weak IIP and core index numbers.

I found some interesting trends. See this Table IV.10 in Monetary and liquidity Conditions chapter. It has data on sources of finance for commercial sector. I have simplified the table a bit. Here is how it looks:

Flow of Financial Resources to the Commercial Sector
  April-March April-September
  2008-09  2009-10 2009-10  2010-11
A Bank sources 48.9 45.3 32.4 52.7
i) Non-food Credit 47.8 44.0 35.5 45.9
ii) Non-SLR Investment by SCBs 1.1 1.3 -3.1 6.7
B Non-Bank sources (B1 +B2) 51.1 54.7 67.6 47.3
B1 Domestic 30.0 34.4 44.3 26.8
1. Public issues by non-financial entities 1.6 3.0 4.1 2.2
2. Gross private placements by non-financial entities 9.0 13.4 12.0 4.1
3. Net issuance of CPs subscribed by non-banks 0.6 2.4 15.5 6.8
4. Net credit by housing finance companies 3.0 2.7 1.1 1.5
5. NABARD, NHB, SIDBI and EXIM Bank 3.6 3.2 -1.0 3.2
6. Systemically important non-deposit taking NBFCs 4.9 5.7 5.5 6.4
7. LIC investment (corporate debt, infrastructure and social sector) 7.2 4.0 7.1 2.8
B2 Foreign Sources 21.1 20.3 23.4 20.5
1. ECBs/FCCBs 3.6 1.4 1.2 5.3
2. ADR/GDR issues excluding banks and financial institutions 0.6 1.4 1.5 1.4
3. Short-term credit from abroad -1.5 3.3 -2.2 5.2
4. FDI to India 18.4 14.2 22.8 8.6
Total Sources 100.0 100.0 100.0 100.0
  • Banking sources have risen. In H1 2009-10 it was 32.4% of total finance. In H1 2010-11 it is 52.7%, increasing by 139.9%. The % is higher even from 45.3% reached in 2009-10 and 48.9% in 2008-09.
  • Non-Banking sources of finance have increased by just 3% in Apr-Sep 10 from Apr-Sep 09 levels. The non-banking sources comprise the remaining 47.3% of total finance, a decline from 67.6% level in Apr-Sep 09 period.
  • Within non-banking, domestic sources have declined from 44.3% to 26.8% and external sources share has declined from 23.4% to 20.5%.
  • Within non-banking domestic , share of private placements, public issues, issuance of CP and LIC investment has declined. Only share of Systemically important non-deposit taking NBFCs, NABARD, NHB, SIDBI and EXIM Bank have gone up
  • Within non-banking external, FDI’s share has declined sharply and share of ECB, ADR/GDR and short term credit has risen.

I find all this data counter intuitive.

First, one would expect non-banking sources to be at growing much faster than 3%. The markets have been booming and one keep hearing about some deal happening esp. in private placements. Just fine combing the data, it is seen some data is not till Sep-10. For instance, Private Placements data is till June-10.  Housing Finance credit, LIC investment and systematic deposit taking NBFC till Aug-10. So, once we have full data, there should be higher growth in this segment.

Same is the case with foreign sources. ECB and FDI till Aug-10 and short term credit till Jun-10. So again, once we have full data we should see more activity here.

Second, banking funds have been to selected industries. RBI adds:

Data on sectoral deployment of gross bank credit show significant improvement in credit flow to industry, services and personal loans during the current financial year, while credit to agriculture has declined further (Table IV.9). A look at the disaggregated data, however, suggests that the credit flow to industry is not yet broad-based as the growth is mainly driven by flow of credit to the infrastructure sub-sector, iron and steel, chemicals and chemical products, other metal and metal products and engineering industries.

So, though bank funding has increased it is limited to selected industries. This is in line with what bankers are usually saying. That credit growth is limited to select industries. Compared to the 30-35% credit growth in previous high growth period, this time credit growth is both lower and to select industries.

The question then is – If India is growing again at pre-crisis levels, how is the growth getting financed? This is a difficult question as we still do not have full data. My sense is non-banking sources should be playing a bigger role than the above numbers. Also growth is not broad-based as earlier times and looks like being driven by select industries.

Then there is other kind of data as well.  Below table shows lending has picked in both private sector banks and public sector banks.

Credit Flow from Scheduled Commercial Banks (Amount in Rs crore)
  Outstanding as on October 8, 2010 Variation (Y-o-Y)
    As on October 9, 2009 As on October 8, 2010
    Amount Per cent Amount Per cent
1. Public Sector Banks 25,67,838 2,83,483 15.2 4,24,171 19.8
2. Foreign Banks 1,75,580 -29770 -15.9 17979 11.4
3. Private Banks 6,39,361 12076 2.4 1,24,213 24.1
4. All Scheduled Commercial Banks* 34,68,999 2,79,305 10.7 5,80,005 20.1
*: including Regional Rural Banks.          

How are banks financing themselves? Below table shows both oversea borrowing and assets have increased.

Table IV.8: Select Sources and Uses of Funds of SCBs (Amount in Rs crore)
  Outstanding as on October 8, 2010 Variation (Y-o-Y)
    As on October 9, 2009 As on October 8, 2010
Sources of Funds   Amount Per cent Amount Per cent
1. Aggregate Deposits 47,88,309 6,94,231 20 6,25,710 15
2. Call/Term Funding from Financial Institutions 1,19,336 -18121 -15.6 20996 21.3
3. Overseas Foreign Currency Borrowings 41342 -34583 -55.5 13637 49.2
4. Capital 65965 13809 30.3 6649 11.2
5. Reserves 3,69,068 48836 17.4 39603 12
Uses of Funds          
1. Bank Credit 34,68,999 2,79,306 10.7 5,80,004 20.1
of which: Non-food Credit  34,19,245 2,85,480 11.1 5,72,971 20.1
2. Investments in Government and 14,75,697 3,87,549 39.6 1,10,264 8.1
Other Approved Securities          
a) Investments in Government Securities 14,70,231 3,92,145 40.6 1,12,680 8.3
b) Investments in Other 5466 -4595 -36.8 -2417 -30.7
Approved Securities          
3. Investments in non-SLR Securities 2,65,729 1,37,765 91.4 -22823 -7.9
4. Foreign Currency Assets 66656 19397 84.8 24373 57.6
5. Balances with the RBI 2,75,559 -1,29,595 -40.7 86832 46

Superb stuff. Atleast you have some data which gives helps you link financial developments to real economy.

4 Responses to “How is India financing its growth?”

  1. Monetary Transmission is working somewhat « Mostly Economics Says:

    […] Mostly Economics This blog covers research work in Economics with focus on India « How is India financing its growth? […]


    always good and simple elaboration of the economic topics

  3. What do you mean by Teaser Rates? « Mostly Economics Says:

    […] mean by Teaser Rates? By Amol Agrawal In second quarter review of monetary policy (see this, this, and this as well), RBI took some measures to discourage teaser loans by Indian banks.   This […]

  4. Banker to India’s growth « Indian Industry Tracker Says:

    […] Amol Agrawal has written a nice piece on How is India financing its growth? […]

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