Falling Growth of Credit in India: Is the Rate of Interest only ResponsibleFactor?

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A general perception that is being built these days is that the lower interest rate is the only solution to slow growth, especially after BJP leader Subramanian Swamy raised it. Theoretically and logically this sounds correct. But, the study shows that even when borrowers were lining up at their doors willing to pay higher interest rates, public sector banks refused to entertain them. This shows that slowdown in credit growth is not only because of high interest rates instead; the loans in public sector banks’ balance sheets are already stressed, and they are unwilling to lend more to those sectors to which they have high exposure.

Credit growth declined to 8.4 per cent (YOY) in April from 9.1 per cent, led by a slump in industrial credit demand, which fell by 100 basis points on a month-on-month basis, as lack of capital expenditure dented appetite.

In past days, 9,000 crore rupees loss that the Kingfisher Airlines has caused the banking system has dominated headlines and mind space. Even though part of this has been paid back by way of pledged shares, so the net loss to banks may be closer to 5000-6000 crores. It iss surprising that this amount is causing so much distress. Almost every business journalist knows that Kingfisher will not rank even among the top 25 biggest defaulters. As the number of existing defaulters even before the entry of Kingfisher was quite high. However, the list of non-performing loans or NPAs is still a closely guarded secret.

Higher NPA ratio trembles the confidence of investors, depositors, lenders etc. It also causes poor recycling of funds, which in turn will have serious effect on the deployment of credit. The non- recovery of loans affects not only further availability of credit but also financial soundness of the banks.

Increasing provisions to cover rising bad loans are likely to hurt bank’s profits and curb credit growth, stocking a vicious circle of lower economic growth triggering more defaults and chocking off business investment and production.

Strong and sustainable credit growth is almost synonymous with a healthy operating environment and strong economic growth. This trend, by and large leads to healthy and profitable asset creation within economy and the banking sector.