One of the main reasons for the liquidity crunch among banks is the sharp rise in credit growth. But how does that square with anecdotal evidence of companies being denied credit and of slowing growth?

One reason is inflation—higher prices mean that companies require more borrowing to maintain the same inventories or for the same projects. Reserve Bank of India data throws up another reason—much of the recent credit increase has been due to borrowings by energy firms.

Here are the numbers: At the end of August 2008, the year-on-year growth in bank exposure to the petroleum, coal products and nuclear fuels industry was 91.8%, up from an annual growth of 23.3% in mid-February. To put that in perspective, similar growth in non-food credit was 22% in mid-February, rising to 26.8% at the end of August. Clearly, the oil companies have been borrowing hand over fist.

Also See Galloping Credit Growth (Graphic)

During the three months from 23 May to 29 August, outstanding loans to the petroleum, coal products and nuclear fuels industry rose by Rs15,171 crore. In contrast, outstandings to infrastructure rose by a comparatively tepid Rs6,059 crore, to the construction sector by Rs4,955 crore, and to engineering industry by Rs4,011 crore. After the energy sector, the next biggest increase in loans was to the iron and steel industry at Rs9,442 crore.

The three months to end-August also saw a sharp drop in the amount outstanding to small-scale industry. These outstandings dipped from Rs1,76,282 crore on 23 May to Rs1,30,554 crore on 29 August. While that’s a prudent measure for banks, since small companies bear the brunt of any slowdown, it’s also an indication of stress in the real economy, because the bulk of employment is at these small companies.

Interestingly, the year-on-year growth rate of personal loans also accelerated, from 13.2% in mid-February to 15.9% at the end of May to 17.4% by end-August. Similar growth in credit card outstandings rose from 50.6% in mid-February to 87% in end-May and decelerated a tad to 86.3% by end-August. This is one area where banks are likely to see a rise in bad loans.

Also, real estate loan outstandings, which were rising at an annual rate of 26.7% in mid-February, saw a sharp acceleration, rising to a year-on-year rate of 46.3% at the end of August. This is another segment where banks are likely to increase their bad debts.

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