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Is credit growth a concern?
Thu, 6 Aug Pre-Open

In 2015, the RBI has cut the repo rate by 75 basis points (bps) up till now. But this has not led to any pick-up in the credit growth. The credit offtake, in FY15, grew at the slowest pace in the last 17 years. Are banks heading for a similar sluggish growth in this year as well?

During the third bi-monetary policy, the RBI governor has stated that there is generally a gap of three-four quarters from when rates are cut and when the effects can be seen in the economy. So far this year, the RBI has slashed the policy rate by a cumulative 75 bps in three rounds. However the banks have been highly reluctant and have cut their rates to a maximum of up to 30 bps . But loan growth has remained weak due to slowdown in credit demand by the corporate sector. Moreover the cheaper funds raised via commercial paper have also contributed to the slow credit growth. As per an article in the business standard the issuance of commercial paper rose by 57% on a y-o-y basis as on July 15, 2015.

The RBI expects the credit growth to pick up in Q3 of FY16. As per a report published by CRISIL, the pick-up would be gradual and in the latter half of 2015-16 driven by a rise in retail loan, public sector investment and small scale enterprises. Recent steps taken by the government to infuse capital in the public sector banks (PSUs) will provide only short term reprieve to tackle bad debts as root problems such as productivity and efficiency of these banks still remain.

The banking sector has been hit by the prolonged slow down in the Indian economy. During the slowdown, investment activity by companies has taken a back seat. Lot of projects are still stalled due to the issues like lack of clarity on policies, land availability, power and labour issues. Unless strong action is taken regarding these aspects, new projects are unlikely to be undertaken, leaving less hope for revival in the credit growth rate.

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Mar 16, 2018 (Close)