When the disposable income in the hands of people increases they buy more cars and houses while companies invest in new projects. This requires money, which they borrow from banks. So, growth in credit or lending is considered to indicate growth much before it happens.
That said, India’s scenario seems confusing. The Gross Domestic Product (GDP) – a measure of the economy – suggests India is growing, and fast at that. But, indicators like credit growth suggest otherwise.
As an investor in the market, you may want to know the future prospects.
Here are five points that can be meaningful to you:
Growth in bank lending is at a 25-year low. Banks gave around 9% more money as loans in the fiscal year 2016-17 so far. In fact, a breakup of the data suggests worse. Loans for non-food sectors only grew 0.1% between March 18 and June 24 of this year. Last year, this was 1.1%. Other sectors too had similar tales to tell. Loans to mid-sized companies faced the worst of the brunt. Only personal retail loans seemed to show any brighter growth, as per a Livemint report. This too, however, was slower than last year.
India has faced with teeming inflation for years. As a result, the Reserve Bank of India (RBI) has had to keep interest rates on the higher side to tame the price rise. Even though inflation fell to comfortable levels in the last 1 year, interest rates did not fall at the same pace. As a result, many blame the hawkish RBI for the lack of demand for loans – as well as economic growth.
It is the RBI’s job to look at every aspect of the economy and take decisions accordingly. Inflation is not the only factor in consideration. Factors like rising bad loans are the biggest contributor to the lack of interest rate cuts. The RBI believes that inflation only fell because of low energy prices in international markets. This means pressure points continue to remain in India. “The slowdown in credit growth has been largely because of stress in the public sector banks, stemming from past mistakes in lending. This will not be fixed just by a cut in policy rates. Instead, what is required is a clean-up of the balance sheets of public sector banks,” Raghuram Rajan said in a recent speech.
Another reason for high interest rates is that banks have not cut interest rates like the RBI. While the central bank cut rates by 1.5% since January 2015, banks only cut interest rates by 0.6-0.75%. Banks continued to complain about tight liquidity issues in the system. Recently, though, the problem of low liquidity has disappeared. This allowed banks to cut some of their lending rates by 0.05-0.1%.
This cut in interest rates can help fuel credit growth. The improvement in company sales can also help. In fact, many banks and analysts have turned positive.
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