Opinion | A credit crunch that still awaits a reversal
Since loans are what move the country’s wheels of commerce, squeezed flows of credit to the commercial sector are a major worry. It will take broad reformist measures to fix this
There’s fear over the city. Dread can be induced through multiple channels and manifests itself in many forms. On occasion, it is the unintended consequence of a policy misstep or a series of administrative failures. It acquires the characteristics of a systemic risk once feelings of anxiety immobilize business decisions and slow the economy down. The policy response then required to reverse the situation needs some creative thinking, a few bold moves, and lots of communication. The Indian economy right now is vulnerable to the effects of apprehension in the Mumbai-based financial sector because risk aversion and loss of confidence have all but shut down business decisions. The Reserve Bank of India’s half-yearly Monetary Policy Report holds up a mirror to the systemic stress: the flow of funds to the commercial sector has dropped precipitously by 88% during the first six months of the financial year. Against ₹7.36 trillion flowing from banks and non-banks to the commercial sector during April-September 2018, this year has seen only ₹0.9 trillion flow over the same period. What is even worse is negative fund flows from banks, implying that lenders are either seeking faster repayments that are higher than fresh credit flows, or are refraining from any fresh lending. Credit is the lubricant that moves the wheels of commerce, and a bank-lending freeze is bound to have a direct impact on India’s economic ambitions. The low 5% growth in India’s gross domestic product witnessed in the April-June quarter—and the sequential slowing down of the economy—is probably an outcome of this credit rigidity.