While observing the slowdown in credit growth, the Economic Survey Volume II, tabled in the Parliament on Friday has attributed it to incomplete monetary transmission by banks, weak balance sheets of banks and corporates and more attractive interest rates for borrowers in the bond market. The survey pointed that the slowdown in credit off-take from public sector banks (PSBs) has been much more pronounced compared to the private sector banks (PVBs).
Bank credit growth an important indicator of economic activity has been at a historic low as it decelerated by Rs 1.5 lakh crore during April to July 21 as per the recent RBI data. The high growth observed in the 2003-08 period was accompanied by a surge in monetary aggregates and credit growth, which usually exceeded the 20 per cent mark year on year. After being impacted sharply by the global financial crisis and the fiscal stimuli over the period 2008-10, credit growth remained at around the 15 per cent mark till February 2014. Subsequently, it has slowed down. During 2016-17, gross bank credit outstanding grew at around 7 per cent on an average. The latest reading for May 2017 is 4.1 per cent said the survey.
“The sluggish growth can be attributed to several factors: (a) incomplete transmission of the monetary policy as banks had not passed on the entire benefit of monetary easing to borrowers; (b) problem of twin-balance sheet (weak bank balance sheet as well corporate balance sheet); (c) more attractive interest rates for borrowers in the bond market and from non-banking financial institutions,” said the Survey.
The trend in deployment of gross bank non-food credit by major sectors shows that credit off take by the industry sector has been slowing. The average gross bank credit to industry contracted by 1.6 per cent in the FY 2016-17. In May 2017, it contacted by 2.1 per cent. Even the personal loans segment slowed down in the second half of the FY 2016-17.
About the shift of loans to the corporate bond market, Soumya Kanti Ghosh, group chief economic adviser, State Bank of India said, “The shift of loans to the corporate bond market is because of the price differential for higher rated corporates. For example, incremental corporate bond in FY17 has now touched Rs 4.17 lakh crore, 44 per cent of the overall credit pie (19 per cent in FY12). However, though the incremental share of corporate bond market is increasing, the overall pie of the corporate loan market has remained stagnant in the last 5 years or so. A depressed investment cycle, persisting excess capacity in manufacturing, and deleveraging by corporates to improve their credit ratings have contributed to the slowdown.”