Slowing Credit Growth

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Credit growth in the economy for the current fiscal year slowed down to 7.1 percent (as of January’20) from 14.5 percent a year ago. The declining credit off-take is an area of concern, and was expressed by the RBI Governor and the Finance Minister. The reasons could be attributed to both the slowdown in the economy and issues plaguing the banking sector.

The Asset Quality Review (AQR) launched in 2015 was a double-edged sword. AQR was launched by RBI to clean up the balance sheets of banks. With AQR in place, banks had to fully recognize their stressed assets.  As a result, the Gross Non-Performing Assets (GNPA) of  banks shot up from 4.3% in March 2015 to 9.3% in March last year. As per the latest Financial Stability Report by the RBI, it is expected that the GNPA ratio will reach 9.9 percent in September’20. This is the consequence of large number of banks being brought under the Prompt Corrective Actions (PCA) framework by the RBI.

AQR was a bold step, and helped in the realisation of stressed assets bringing in more transparency to the banking system. However, it also made the banks more risk averse. In their struggle to contain NPAs, lending by the banks got affected.

In such a scenario, it was the NBFCs that stepped in to fill the gap left by the banks. However, default by IL&FS shook the NBFC sector. Even the NBFCs with good credentials found it difficult to raise capital from the market. Banks became even more cautious in their lending to NBFCs. With the lending by banks and NBFCs on a decline, credit growth in the economy got hit.

The slowing economy along with the liquidity crisis further worsened the situation. Though the government and RBI has initiated various measures to improve the credit growth in the economy, its positive impact is yet to be seen. Government mainly focussed on the recapitalisation of the Public Sector Banks (PSBs) to improve the liquidity in the system.  Between FY15 to FY19, PSBs have been recapitalised to the extent of Rs 3.5 lakh core. Similarly, the Central Bank has also initiated various measures to support liquidity. In the last MPC meeting, RBI announced various measures to improve the credit growth including CRR exemption for banks on loans for auto, housing and MSMEs. Similarly, not recognising the asset as NPA for commercial real estate projects delayed for reasons beyond the control of promoters, by extending the date of commencement of commercial operations (DCCO) of project loans by a year.

All the above measures would help in improving the liquidity in the system. However, the measures mainly focus on addressing the supply-side issues. There is also need to focus on the demand-side issues. Thus, the revival of consumption and investment demand is important in this regard.  

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