The concern is not just about deleveraging by investors. The Reserve Bank of India (RBI) statement that announced Wednesday’s repo (the rate at which it lends to banks) and reverse repo (the rate at which banks park their funds with it) cuts points to the sharp deceleration that has occurred in bank credit growth since October. The statement says the growth between 10 October and 13 February was Rs38,980 crore, compared with Rs1.92 trillion during the corresponding period of the previous fiscal year. In other words, between 19 December and 13 February, the difference in bank credit growth between the current fiscal and the previous one works out to Rs78,887 crore. That is a powerful illustration of the extent of the slowdown.
RBI, in its third quarter review of monetary and macroeconomic developments issued on 26 January, says the total flow of resources from both banking and non-banking sources (such as capital markets, external borrowings and, investments in commercial paper) amounted to Rs4.84 trillion “so far” in 2008-09. The review doesn’t say what that “so far” means, but we can assume it to be sometime in early January. It also says the flow of resources from banking and non-banking sources for the comparable period of the previous year was Rs4.99 trillion, which means that while the total flow of resources in the current year has been lower, the difference is not much.
Now, consider what RBI said in its statement on Wednesday: “The total flow of resources to the commercial sector from banks and non-banks during 2008-09 so far (up to 13 February) at Rs4,98,136 crore was lower than Rs6,08,351 crore during the corresponding period of the last year.”
That means since the date of compilation of the table in the third quarter review, the total flow of resources to firms has gone up by just Rs13,423 crore. Over the same period in the previous year, the total flow of resources to the commercial sector went up by Rs1.08 trillion. So, the difference in the total flow of financial resources to the commercial sector between the current fiscal and the previous one in January and February works out to Rs95,444 crore.
The data shows how much and how rapidly growth has slowed. Part of that is due to cautious lending, but a large part of it is also on account of lower demand. Also, since raising capital is difficult in the current environment, banks are wary of lending and bad debts. And if credit growth has slowed so dramatically despite a spate of rate cuts, it is unlikely that the latest 50 basis points cut will do anything to reverse the tide. Analysts point out, though, that retail loans are likely to pick up before commercial loans do.
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