Did we have a debt bubble in India too during the boom years 2003-07? To what extent then can we expect bank credit growth to fall during the downturn?
In order to consider these questions, we looked at the increase in bank credit during a year as a proportion of the gross domestic product (GDP) at factor cost at current prices in that year.
But since the credit numbers get distorted at the end of the fiscal due to window-dressing by banks, we have taken the year ended mid-February as the growth in bank credit.
Also See A Long Way To Fall (Graphic)
To illustrate, for the year 2008-09, bank credit for the year ended 13 February 2009 is divided by the Central Statistical Organization’s estimate of GDP, at current prices, for the year 2008-09 and then expressed as a percentage. And a similar exercise is carried out for earlier years. As the chart shows, bank credit as a percentage of GDP at current prices rose from 4.1% in 2003-04 to 11% in 2006-07. Thereafter, it fell to 9.3% in 2007-08 and is around 8.7% this fiscal. Notice that in 2001-02, during the depths of the dotcom bust, bank credit was just 3.2% of GDP.
The data seems to indicate that bank credit growth is likely to slow significantly in future, unless, of course, the government arm-twists the public sector banks to lend.
But perhaps the slowdown in bank lending to businesses will be offset by higher lending to the government? To gauge that, we added up the growth in bank credit with the growth in bank investments in SLR securities. Here are the results: annual bank credit growth+annual growth in bank investments in SLR securities (year ended mid-February) as a percentage of GDP for the year was 6.8% in 2001-02, 5.5% in 2002-03, 9.2% in 2003-04 and increased every year thereafter, moving up to 14.2% of GDP in 2007-08. In fact, in 2007-08, the slowdown in bank lending to firms was more than offset by higher borrowing by the government.
This year, taking bank credit+investments up to 13 February, the ratio is 12.5% of GDP. That seems to indicate that government borrowing from banks this year has not been sufficient to offset the fall in bank credit to other sectors.
Write to us at email@example.com