In the first five-and-a-half months of fiscal 2010, until mid-August, the growth in bank credit was just 1%, or Rs26,421 crore. In the past one year until mid-August, the year-on-year (y-o-y) credit growth was 14.9%.
Bankers are saying companies are not coming forth to lift credit and some lenders are even planning to extract a commitment fee from the borrowers for not drawing their loan limit. Indian firms—particularly small and medium ones—are, in turn, blaming the banking industry for not disbursing funds.
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What is the real story? Are the banks choosy about giving loans because they are scared of piling up stressed assets? Or are companies postponing their investment decisions because they are not confident yet about economic recovery?
Indeed, the credit offtake has been low, but it isn’t that gloomy as yet. In the recent past, there have been instances when the Indian banking industry has recorded even lower credit growth in the first half of a fiscal year than what we are seeing now. For instance, in the first five-and-a-half months of fiscal 2008, when the Indian economy was growing 9%, credit growth had been 0.4% (Rs7,042 crore).
In the comparable period of fiscal 2003, loan growth had been even lower—0.1% (Rs550 crore). The y-o-y credit growth until mid-August 2003 was 11.7%, some 3.2 percentage points lower than the current pace of growth.
Not too many bankers are ready to attach too much importance to the tardy credit growth and they say it is a common “slack season” phenomenon. Traditionally, the Indian banking industry divides the year into the “slack season” (between April and October) and “busy season” (November to March).
Post-harvest, rural consumer demand picks up in November; industrial and construction activities too perk up between November and March with rising demand for goods and services and this gets reflected in bank credit growth.
This argument would have been valid in the past when the economy’s dependence on agriculture was far higher than it is now. Industrial and construction activities now persist throughout the year and the relation between the harvest season and consumer demand is also getting thinner.
Crude fact
A key reason for lower growth in non-food credit this year is a sharp decline in credit to petroleum and fertilizer companies—a decline of Rs18,800 crore in the first three months of the fiscal year, compared with an increase of Rs6,500 crore last year. In fiscal 2009, oil prices rose sharply because of tight supply-demand conditions, geopolitical tensions, weakening of the dollar against major currencies and increased interest among investors and financial market participants.