[op-ed snap] Trouble with credit

Mains Paper 3 : Indian Economy |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Slowdown of credit in the economy


Context

The Monetary Policy Report of the RBI paints a worrying picture of credit flows in the economy. 

Status of credit flows

  • Between April and mid-September this year, the flow of funds to the commercial sector collapsed to Rs 90,995 crore, down from Rs 7.36 lakh crore over the same period last year. 
  • Non-food bank credit has declined
  • Flows from NBFCs have declined. 
  • Foreign flows have picked up during this period. 
  • Typically, credit flows in the first half of the year tend to be subdued and pick up in the second half. The decline this time around compared to the previous year is staggering.

Reasons behind this decline

    • It appears to be due to a combination of two factors 
      • a collapse in demand
      • risk aversion

Corporate investments

    • An over-leveraged corporate sector is in the midst of a much needed deleveraging exercise. 
    • In the current environment of subdued demand and low capacity utilisation rates, there is little incentive to launch fresh investments.

Banks

    • On the other hand, banks appear to be reluctant to cut rates to boost lending.
    • They are parking more funds in government securities and with the RBI.
    • RBI report notes that banks have increased their SLR portfolios, holding excess SLR of 6.9% at the end of August 2019 indicating a reluctance to lend.
    • In the face of growing economic uncertainty, banks have tightened credit norms, reducing those eligible for credit.
    • The shift in the liquidity stance from deficit to surplus mode has also not helped boost credit flow to the larger economy. 

Crisis in the NBFC 

      • This has only deepened. 
      • Bank credit and the commercial paper market remains shut for NBFCs.
      • Credit flow from NBFCs to the larger economy has suffered and the fallout is visible in the decline in household debt fueled consumption.

Conclusion

  • A slowdown in economic activity will increase stress on the repayment capacity of borrowers and increase the rise of default, making lenders even more cautious. 
  • The first step towards rebuilding trust, and addressing the stress in the financial sector in order to get credit flowing, should be to ensure a quick and orderly resolution of stressed NBFCs.
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