Mumbai: Besides the power, telecom, textiles and manufacturing sectors, bankers are also seeing a steep fall in the flow of money into segments such as personal loans, mortgages, auto loans and even education loans—a sure sign of the stress in Asia’s third largest economy, hit by persistently high inflation and interest rates.

Growth of credit to agriculture and related activities fell to 5.6% from 25.4% in the same period.

A number of other sectors such as power, cement and engineering also witnessed loan growth nearly halving during the period.

The fall is most severe in telecom, micro-credit and the so-called priority sector that comprises loans to weaker sections and exports, among others.

Growth in loans to the telecom sector has shown a decline of 3.8%, while that to micro-credit a fall of 27.1%. While banks slowed lending to telecom in the face of the ongoing controversy regarding the allocation of second-generation airwaves, that to micro-credit slumped because of a crisis that hit the sector after Andhra Pradesh, the largest market for micro-credit, passed a stringent law to control microlenders late in 2010.

The sectors that relate to the retail consumption of loans were also not spared. For instance, personal loan growth dropped to 12.3% from 16.7% in 2010; auto loans to 17.7% from 29.8%; education loans to 13.8% from 23.4%, and mortgages to 2.3% from 10.7%. The RBI mortgage data, however, does not include home loans disbursed by finance firms.

Economists attributed the sharp fall in credit to successive rate increases by the central bank that have hampered demand in the economy by making money costlier for the public. This resulted in inadequate flow of credit even to productive sectors. To fight inflation, RBI has raised its key rates 13 times since March 2010, taking its policy rate to 8.5% from 3.25%.

Inflation, as measured by wholesale prices, fell to 7.47% in December and 6.55% in January after staying close to double digits for almost a year. RBI has an inflation forecast of 7% by end-March.

“Large-scale investment has suffered on account of RBI rate hikes. As compared with other sectors like beverages and tobacco, the credit flow should have been more towards the core sectors as they are critical for sustainable economic growth. But the increasing cost of borrowing has prevented that,” said Madan Sabnavis, chief economist at CARE Ratings.

Growth in lending to sectors such as beverages and tobacco, consumer durables and credit cards has increased manifold during the period, RBI data showed.

According to Sabnavis, lack of availability of funds to productive sectors is likely to further slow the pace of recovery in the economy.

“Investment and construction activities have slowed in recent years. Due to this, recovery is going to be a slow and gradual process. The kind of economic recovery India had witnessed in 2009-10, we may not see now. By hiking rates, RBI has done the right thing (to control inflation), but RBI has to look at a more macro view and support investment sentiment,” he said.

India’s gross domestic product growth in the July-September quarter fell to 6.9% from 7.7% in the April-June quarter and 7.8% in the quarter before that. RBI has lowered its growth target for the current fiscal to 7% from 7.6% estimated earlier, besides indicating that bank credit growth could slow to 16% from 18%.

“The sharp economic slowdown has impacted credit growth and investment in the country. While loan growth to the core sectors has slowed down, consumer-related sectors have done well as there is still demand,” said Sajjid Chinoy, India economist at JPMorgan.

Rising exports and robust demand have helped loan growth to gems and jewellery, he added. According to Chinoy, credit growth is likely to be around 13-14% in the current year.

Bankers and some economists said the scarcity of viable projects and poor demand were the primary reasons for the sharp decline in credit. Forcing banks to lend to vulnerable sectors during the economic downturn could propel growth in bad loans in the banking sector, they said.

“As bad loans rise, risk aversion of banks will also rise simultaneously. The real problem is that certain productive sectors of the economy become credit-starved if the banks become too risk-averse,” Chinoy said. “At the same time, asking banks to be very aggressive is also dangerous as artificially pushing up credit can create higher NPAs (non-performing assets) in the future. We have to live through the downturn.”

S. Raman, chairman and managing director of Canara Bank, said negative sentiment across sectors has impacted credit appetite of borrowers.

“Banks are lenders, but projects have to be viable to lend. The reason for poor credit flow is that there is no demand,” he said. “Sentiment was poor across the sectors last year and they keep on worsening. The capital goods segment has grown negatively, which has also hurt sentiment. Hopefully, in this calendar year, there will be an improvement in overall sentiment.”

dinesh.n@livemint.com

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