Rapid credit growth gives regulators an attack of nerves- they tend reflexively to associate these with a coming bust. To regulators, runaway credit growth is a sure sign that bankers are compromising on credit quality and that massive non-performing assets will follow.
Scheduled commercial banks' commercial credit- or 'non-food credit' as it is called- grew at 30.8% year on year in 2005-06. This was on top of growth of 28.8% in same period in 2004-05. There is little sign of a slowdown in 2006-07- in July 2006, y-o-y growth was 32.9%.This appears to have the RBI a trifle worried. It would like to see credit growth slowing down to 20% in the coming year.
I believe this concern is a trifle overdone. It's not aggregate credit growth alone that matters. You need to look at three factors: the composition of credit (especially corporate versus retail, exposure to sensitive sectors); the sources of funds for banks (domestic currency versus foreign currency); and whether there are signs of macroeconomic balances. I argue in my column in the
Economic Times that, viewed in relation to these factors, the credit growth we are seeing does not warrant undue concern.
I didn't have a chance to mention in my column that the RBI itself took a rather benign view of credit expansion in its Report on Trend and Progress in Banking in India (2004-05)- box on page 68. It noted that credit expansion in 2004-05 was more broad-based than in the previous years, with credit to industry and agriculture joining the retail sector in driving the demand for commercial credit. It also noted that NPAs in the retail sector, which has provided some of the impetus to credit growth, are still low- around 2%. "Therefore", the RBI concluded, " if banks put adequate risk monitoring and management systems in place, there should not be much cause for concern for the future, although past performance may not always be a good guide".
This was in the Report released in November 2005. Maybe the RBI reckons that three years in a row of rapid credit growth is a bit too much. Remember, however, that GDP growth continues to be robust.Let me qualify my upbeat assessment by saying that, while credit growth may not pose systemic risks, some banks could be asking for trouble.
At least some of the lending rates point to under-pricing of risk by public sector banks. They have responded to rate cuts effected by some of the savvier private banks. But the private banks know what they are doing. They have systems to measure return on capital for any given borrower, retail or wholesale. Not so the public sector banks. The RBI's response has been to increase risk weights for various retail loans. That should cause errant banks to take a closer look at their pricing. But there could be banks out there that fail to make the link between capital allocation and pricing.
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2 comments:
Dear Prof.
In your two postings related to credit scenarion in India, you have commented about how the retail credit is growing and also how that the farmers are neck deep in debt which as we see is resulting so many suicides all around the country amongst the farmer community.
I feel that's it's high time economists and bankers in the country start working towards evolving a model of microcredit for the farmers whichmight be a emulation of the model being used by Md. Yonus in Bangaladesh or may be some indigenous one, because instead of balking on the fact that by 2011 70% of GDP contribution will come from urban sector we should realize the potential of a situation when equal contribution can be taken out of rural economy.
Yes, we need to make sure that credit to farmers goes up. But I am not sure that the Grameen Bank model is the way to- see my latest post on microfinance. The commercial bank sector needs to ensure that more credit reaches farmers. I'm glad to note that we seem to made some headway in the past three years or so- agricultural credit has virtually doubled, although not all of it is credit for the small farmer.
-TTR
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