Is there a credit squeeze in India?

They say that Indian firms face a credit squeeze because non-bank sources of credit, including overseas sources of credit, have dried up. Banks are lending more than they did last year: commerical credit grew by 24% in the period upto Jan 2009 compared with growth of 22% last year. But, it's the lack of funds from other sources that's the problem- so we hear.

Well, the RBI's latest credit policy statement has comprehensive data on total flow of funds to industry, from bank as well as non-bank sources, including financial institutions, NBFCs, capital markets, ECBs, FCCBs, ADRs/ GDRs, FDI and short-term credit. In 2007-08 (upto Jan 4), total funds to the commercial sector was Rs 499,000 crore. This year, it was Rs 484,000 crore- a shortfall of 3% with respect to last year. How does this qualify as a squeeze that is throttling Indian industry? Somehow, the numbers don't bear out the sense of a huge credit crisis.

There is one possible explanation, though, one that I ventured earlier. Some portion of what appears as bank loans could be merely 'loans recoverable' against mark-to-market losses of firms. This is not really credit for productive purposes. To that extent, official figures for bank credit growth would overstate supply of credit.

I have said that the RBI needs to quantify this item. Only then will we know how real is credit growth- and, of course, we will also have some idea of what sort NPAs banks are likely to face on account of firms' mark-to-market losses. Much of this has gone into litigation or is being sorted out through negotiations.