Thursday, February 05, 2009

Banks under pressure to lend more

I just don't get this. Credit has grown by 24% over the year. This is also the target for credit growth the RBI has set for the coming year. Yet, there are complaints that banks' aren't doing enough.

For the coming year, let's assume GDP growth of 6%. Add an inflation rate of 4%. That gives us nominal GDP growth of 10%. Is credit growth of 24% not adequate to support nominal GDP growth of 10%? Alright, I understand that various other sources of funds have dried up- the capital market, overseas borrowings etc. But RBI data show that in the year to date, total flow of resources to the commercial sector is only 3% lower than in the same period last year. I'm not sure that qualifies as a 'credit squeeze'.

The RBI's credit policy statement shows that credit growth has been high only for public sector banks. Credit growth in PSBs has risen from 20% last year to 29%. Private banks and foreign banks show an appreciable deceleration in credit growth- from 24% to 12% at private banks and 31% to 17% at foreign banks.

Either the private players are market-savvy and are right in slowing down credit - as many have always claimed they are- or they are more risk-averse than public sector banks. Which statement is true? Again, there has meaningful decline in lending rates only among PSBs. Rates remain rigid for private and foreign banks. This again underlines the fact that, in a crisis, even if you want to stimulate credit growth, it helps to have government ownership. Governments in the US and Europe are rediscovering this truth.

Government and industry want banks to lend more and reduce rates (which in itself is a bit of a contradiction). There are structural limitations to both credit expansion and rate reduction. I elaborate on this in my latest column, Should banks be lending more?

3 comments:

gopi kumar v said...

Sir,
Your arguments done based on comparisons of figures looks logical. But if you can delve more into the details and analyse the ground realities the figures seems to be misleading. There is real issue to credit squeeze in the economy.Most of the credit expansion which happend during the first 9 months of this financial year has gone into presently illiquid assets like real estate and stock markets.Businesses, especially the small ones are unable to get more credit as they 've defaluted in their loan repayments and other obligations recently, thereby affecting their credit worthiness.The lenders 've also tightened their credit appraisal standards leading to more squeeze.NBFCs used to take more risk in lending to the small businesses but in present market conditions even they are not able to raise funds.There has been a tightening of credit standards across the supplychain in all sectors.Ex: companies like Dabur has started insisting on cash payments and they 've also increased their supply frequency.Banks are either unwilling to renew the cash credit limits of firms or reducing it as the collaterals 've lost their value because of the crash in real estate.
Hence i feel that mere number crunching will be misleading as the ground realities are different.

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