A discordant note has crept in amid all the optimism in the stock market, amid the hope generated by better-than-expected numbers for the March quarter gross domestic product (GDP) and amid the continuing upturn seen in industries such as cement, steel and automobiles.
That jarring note is the continuing deceleration in credit growth. Reserve Bank of India (RBI) data shows that for the year to 22 May, credit growth for all scheduled commercial banks was 15.2% year-on-year, well below the rate at which it was growing a month earlier.
As the chart shows, the year-on-year growth of bank credit has been steadily falling for the past month and a half.
Moreover, credit growth has been much lower than in the same period last year. For example, between 27 March and 24 April 2009, credit contracted by Rs21,967 crore.
The chart shows, the year-on-year growth of bank credit has been steadily falling for the past month and a half. Ahmed Raza Khan / Mint
In the same period of 2008, credit contraction was much more at Rs37,129 crore. But for the more recent period, that is, between 24 April and 22 May 2009, credit contracted by Rs12,840 crore, while it expanded by Rs35,102 crore over the same period last year.
In short, between 27 March and 22 May 2009, credit contracted by Rs34,807 crore, while it contracted by just Rs2,027 crore over the same period last year.
That is not surprising because the economy is obviously growing at a much slower pace than it’s pace at this time last year.
In fact, credit growth had turned negative towards the end of last year as the credit crunch took hold. But once RBI succeeded in providing liquidity and encouraged banks to lend, there was a brief period in February and March when bank lending really picked up.
It now looks as if that was a flash in the pan, possibly due to an upsurge in election spending and by end-of-the-year government spending.
Negative credit growth at this time of the year is normal. But the steady fall in the year-on-year rate of growth of bank credit underlines the fact that the economy is not yet out of the woods.
For, if companies are expanding, surely they will need more credit. And if the economy is indeed recovering, shouldn’t credit growth recover as well?
In short, continuing government stimulus is essential if the economy is to get better.
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