There is bound to be a number of concerns on our central bankers’ minds as the economy transitions to 2010, and low credit growth—which hasn’t picked up in the last few months—is surely one of them. Year-on-year bank credit growth as of 4 December, as the Reserve Bank of India (RBI) released last week, clocked in at 10.5%—below RBI’s projection of 18% for this year.
Most bankers will tell you that if this indicator doesn’t pick up, companies may be starved of cash. But companies don’t really seem to be starving. So, how much does this matter?
First, the business cycle would suggest that recoveries after downturns can proceed without credit. Companies either just use up unused inventories or, thanks to lower prices, the cost of financing inventories comes down. ICICI non-executive chairman K.V. Kamath noted the latter point in a Mint interview this month as a reason for lower bank funding. So, credit lags behind growth, something that happened in India during the last such recovery in 2002-03.
Second, companies have access to non-bank avenues of finance. Recent quarterly results point to good profits—these retained earnings can reduce credit dependence. What’s more, compared with last year (which most credit figures are), firms are raising cash via domestic capital markets—especially qualified institutional placements—and through overseas borrowings. In the wake of Lehman’s bankruptcy last year, both these routes were shut off.
It’s true that external commmercial borrowings can’t help a firm meet the working capital requirements banks usually do. But markets are buoyant enough right now for companies to get short-term financing through money market mutual funds or overnight debt issuances.
Third, it’s unclear if bank credit is as bad as it seems. A Deutsche Bank note last week asked if the stock of bank credit—what is usually reported in such recoveries worldwide—is a good indicator of new credit flowing in the system. In India, at least, RBI figures don’t show new loans.
Nevertheless, if the central bank happens to think that credit is seriously low, this will be a factor in its monetary policy stance to be announced next month: Low credit growth would be a reason to keep up easy money. But this is a stance that the conservative central bank has otherwise signalled it will reverse. Which way RBI moves, we’ll find out next year.
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