Bank credit has registered the highest growth in the last four years. Overall credit of commercial banks grew at the rate of 12.2 percent in the month of August on a year-on-year (YoY) basis. Bank credit growth is one of prime indicators of market confidence because if corporate is bullish about the market it borrows more and invests more. The recovery in bank credit is visible since the month of November last year when it crossed 8 percent, the credit growth touched double digit in April this year and reached 12.2 percent this month. The highest credit growth was witnessed in service sector which expanded at 26.7 percent, highest in last five years and personal loans grew by 18.2 percent.
The credit growth in infrastructure and industrial sector was that much impressive, infrastructure grew at 4.3 percent while industrial credit growth was 1.9 percent. This suggests that businesses in industrial and infrastructure are not bullish. Infrastructure growth in recent years was mainly supported by government investment. In fact, credit growth in infrastructure saw contraction from April, 2016 to May, 2018. Infrastructure is expected to face problems in upcoming months due to Il&FS crisis. “The IL&FS issue will create an environment where funding will become an issue for the kind of projects it supported… We are struggling with IL&FS, which was the biggest supporter of public private partnership. So, unless the PPP model gets the confidence, private investment in infrastructure will remain an issue,” said Vipin Sondhi, MD and CEO of JCB India. Capacity utilization in industrial sector also recorded a decline in the first quarter of this fiscal year. Therefore, services sector is blue eyed boy for banks in the current situation. Indian economy is primarily dominated by service sector therefore economy is poised to grow in the upcoming years because credit growth has continuously increased in the services sector in the previous months.
Bank credit has been lopsided in the country for more than a decade. After the global depression of 2007-08, Indian banks exuberantly distributed money to corporates. Some loans were given to genuine borrowers but most of the loans have gone to people well connected in political circles and to management of the public sector banks. “One promoter told me about how he was pursued then by banks waving cheque books, asking him to name the amount he wanted,” wrote Rajan in his review of NPA problem. “Too many loans were made [given] to well-connected promoters who have a history of defaulting on their loans” he added. The economic growth started slowing down in last three years of the second UPA government. The slowdown in economic growth coupled with exuberant lending resulted in pile up of NPAs. In few years, NPAs became the most important issue for the government.
Raghuram Rajan, who took over office in the last months of 2013, took very hawkish approach for the cleanup of banks. RBI started asset quality review (AQR) in December 2015 to ensure that lending practices become healthy. It also downgraded 150 borrowers as NPAs under the new mechanism to identify NPAs. “Our intent is to have clean and fully provisioned bank balance sheets by March 2017” said Raghuram Rajan in February 2016. The hawkish approach led to the slow down of bank credit and the economic growth suffered.
Modi government brought Insolvency and Bankruptcy Code (IBC) to solve NPA issue. The things are getting solved and banks got a substantial amount of money back through resolution of many bank loan cases. Central government also decided to pump money in public sector banks to increase capital adequacy. Now the things have become better and it is expected to improve further because banks have enough capital and corporate is willing to take loans. The growth credit will result in investment in markets and therefore economic growth will improve further.
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