The Reserve Bank of India (RBI) estimates that growth in non-food credit extended by banks is going to be 20% in FY10. At present, it’s about 18.5%, which means that RBI expects credit growth to accelerate this fiscal year. If it does, it’ll place India in a very different position from most other emerging markets. According to the International Monetary Fund’s (IMF) latest Global Financial Stability Report, real credit growth in the emerging markets as a whole is expected to be a negative 3.98% in 2009, -13.22% in 2010 and -15.83% in 2011.
Also See Contraction Ahead (Graphic)
As the chart shows, the only previous year during which bank credit in emerging markets contracted sharply was in 1990 and 1991. Says the report, “Large credit contractions are still likely to materialize in some countries in emerging Europe. Credit growth is set to slow considerably also in Asia and Latin America over the coming years, as banks in these regions are increasingly reluctant to lend with deteriorating economic conditions and rising loan write-downs.”
At the same time, the report also points out that these projections may not work for many emerging markets. That’s because it’s applicable to an “average” emerging market and that may be skewed by the presence of emerging Europe, where many countries are dependent on foreign banks for credit. Also, it says that the model does not take into account the potential in many emerging markets for policy responses that are stronger than the average response in the sample, made possible by historically large international reserves and strong fiscal positions. And third, the report says that the “global policy response under way, with increased resources for the IMF and other international financial institutions, may mitigate the impact of the financial crisis on emerging markets”.
India has been showing robust credit growth so far and Chinese credit growth has been explosive this year. That is perhaps why IMF’s estimates of credit growth for all emerging markets is a relatively less extreme -3.98% this year. What’s worrying is the continuing deterioration forecast in 2010 and 2011, which seems to show that conditions are likely to get progressively worse.
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Graphics by Ahmed Raza Khan / Mint