A macro-economic perspective of lending in 2009

As per data at a disaggregated level drawn from 49 banks accounting for 95 per cent of total bank credit, the year-on-year growth in bank credit to industry was lower than that in the previous year. While the credit flow to agriculture, real estate and SMEs remained high, it was lower for housing, NBFCs and for the larger industries.

At the peak of the global economic crisis, banks were reluctant to lend money to corporates. Later during the year, companies shunned bank loans, as they found other sources for money to be more economical for them. This has lead to a reduced growth in credit for most sectors in the economy.

Bank Credit

Non-food credit by scheduled commercial banks (SCBs) decelerated significantly, with the growth rate year-on-year (y-o-y) falling to 11.2 per cent this year (as on October 9, 2009) from 29.4 per cent a year ago.

On a financial year basis (up to October 9, 2009) too, the growth in scheduled commercial banks’  non-food credit at 4.3 per cent is significantly lower than the growth of 10.5 per cent in the corresponding period of last year.

Several factors have contributed to the slowdown in non-food bank credit:

1. Overall credit demand from the manufacturing sector slowed down reflecting a decline in commodity prices and drawdown of inventories.

2. Corporates were able to access non-bank domestic sources of funds and external financing – which had almost dried up during the crisis – at lower costs.

3. Unlike in the previous year, oil marketing companies reduced their borrowings from the banking sector as oil prices moderated.

4. A significant amount of bank finance has gone to the corporate sector through banks’ investment in units of mutual funds.

5. Banks have also reined in credit to the retail sector due to the perceived increased risk on account of the general slowdown.

This credit retrenchment was more pronounced in the case of foreign banks and private banks.

This is evident from bank group-wise analysis, which shows that credit from private banks slowed down sharply, while that from foreign banks actually contracted.

Thus, despite ample liquidity in the system, non-food bank credit expansion slowed down.

Bank Group-wise Credit Growth (Y-o-Y) as of October 2009 (%)
Bank Group	2008-09 (October 10, 2008)	2009-10 (October 9, 2009)
Public Sector Banks	32.7	15.3
Foreign Bank Group	32.9	(-) 15.9
Private Bank Group	19.7	2.5
Scheduled Commercial Banks*	29.5	10.8
* Including RRBs.

Shift in Banks’ Income Source

With the loan disbursement coming down, banks have been looking at alternative avenues to park their funds. Banks used the ample liquidity available with them to make large investments in government securities and also fairly sizeable investments (of the order of Rs.92,000 crore during the current financial year so far) in units of mutual funds.

Consequently, commercial banks’ investments in SLR securities (including securities acquired under the Liquidity Adjustment Facility [LAF]) increased to 30.4 per cent of their NDTL as on October 9, 2009, up from 25.7 per cent a year ago. Net of LAF collateral securities, banks’ SLR investments were at 27.6 per cent of NDTL as on October 9, 2009.

As per data at a disaggregated level drawn from 49 banks accounting for 95 per cent of total bank credit, the year-on-year growth in bank credit to industry was lower than that in the previous year.

While the credit flow to agriculture, real estate and SMEs remained high, it was lower for housing, NBFCs and for the larger industries.

Who Funds the Commercial Sector?

During the peak of the crisis (Third Quarter Review of January, 2009 by RBI), it was noted that the flow of resources to the commercial sector from both bank and non-bank sources had contracted.

While bank credit continues to decelerate as indicated earlier, there has been a turnaround in financing from non-bank sources. The resource flow from non-bank sources increased in Q2 of 2009-10 with increase in foreign direct investment, pick-up in primary issues, increased support from insurance companies, and large investment by mutual funds in non-gilt debt instruments.

While the resource flow from the non-bank sources was marginally higher in 2009-10 (up to October 9), the total flow of financial resources to the commercial sector declined in comparison with the corresponding period of 2008-09 due to slowdown in bank credit. The table below (from RBI) shows the status in numbers.

Summing Up

Year 2009 has seen Banks and Corporate India sailing through a very turbulent global financial crisis, without suffering the losses faced by other ‘Developed Countries’. Banks have been cautious with their lending to risky profiles. In turn Corporate India has found other sources of funding that have proven to be more cost effective then banks.

Year 2009 has created an environment where the banks and corporate India needed to be stronger, leaner and more innovative. With year 2010 around the corner, India seems well poised to stabilize and grow by leaps and bounds.

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