-Garima Pandey

“Money talks, but credit has an echo.”

This statement briefs the importance of credit in our daily life. We make money, then deposit it with a bank at a nominal interest rate of 4-6%. Afterward, the bank keeps a certain percentage with itself and lends the rest to the needy from whom the bank makes the money. Companies take loans to finance their needs for investment and working capital. On the other hand, households need loans to fund their education, improvement in living standards, housing, etc. NBFCs (Nonbanking finance companies) take loans to provide for the credit needs of their customers. This depositing and lending cycle run the economy of a country. The Gross Domestic Product surges up as an outcome.

However, this positive process seems too positive to grow at such hefty rates.

According to Reserve Bank of India (RBI) Data, the Total bank Credit has shown double-digit growth in the previous year, it grew by approximately 16% on a year-on-year basis despite increase in lending rates. Personal loans acted as the vital component, at the same time Bank loans constituted 47.5% of the Total credit to the commercial sector in the financial year 2021-22. The Data showed that lending activities soared even more than in the pre-pandemic days. The RBI’s rate hikes have not even dented the demand for credit. Now, the question arises who is deriving the benefits of credit? The answer is, credit growth is vigorous across sectors – farming, industry, services, and ret, ail, etc, not have only commercial loans grown, but also domestic retail loans, rural banking loans, and corporate loans have shown a robust increase. Are the banks “treading on the same rake” as earlier? Tripping down the memory lane, No one is unfamiliar with the economic crisis of 2008. The banks gave out credit freely from 2004 to 2008 and most of this credit defaulted upon the outbreak of the crisis. But, this time the banks are keeping an eye on whom they are lending, they are approving a few percentages above a quarter percent of applications they are receiving.

But the question is why lending freely more than ever has become the ‘modus operand’ of most commercial banks in India.

Credit to industries: Since 2016, credit to industries was muted, almost 0%. Now, various industrial sectors are demanding for advances to meet up their working capital and investment demands. The demand for credit stands at 12.6% for the industrial sector from 1.7% a year ago which has significantly affected credit growth. But why are industries willing to pay a higher price for their loan requirements with the increase in the cost of borrowing? The answer lies in the economic principle of ‘Marginal Efficiency of capital’ or MEC. It displays the expected returns on leveraging our capital as an investment over a given period. World economics is proof that with the increase in the cost of borrowings, the cost of production increases which in turn leads to cost-induced inflation. Therefore, the net impact on industry stakeholders is positive.

Revival of Service Sector: During the pandemic, the growth of the service sector was negligible. The service sector including travel, tourism, entertainment, etc is picking up pace. The service sector demand for credit surged up to 20% from 1.2% a year ago at the dawn of the pandemic.

Decrease in GNPAs: One of the reasons that gave green light to banks to encourage lending is, as per the reports, the gross nonperforming assets (GNPA) declined to a six-year low of 5.9% in March 2022 and experts indicated that non-performing loans of banks are expected to decline even more. The negativity bubble around the process of providing credit burst with the decrease in bad loans. As per the RBI reports, bad loans are expected to decline to 5.3% of the total advances by March 2023.

Alternative for other sources: Generally, the increase in credit is marked by an increase in investments across the industrial sector. However, with the increase in input cost, this year the credit taken just made up for the requirements of raw material and fuel needs. Earlier, these needs were fulfilled by non-banking and overseas loans which are comparatively costlier. The current situation is evidence of the replacement of other sources of credit and is not a sign of augmentation of investment.

Capital adequacy requirements: With the decline in NPAs and surge in total advances, the Bank’s Balance sheet has shown stability and capital buffets are quite adequate for prospects. In earlier days, only 20-25% of the PSBs (Public Sector banks ) met the Tier-I capital adequacy requirements, now all banks meet the requirements. Therefore, the sources of credit have broadened for credit seekers.

Capex Requirements: In recent months, the government has shifted its focus to infrastructural growth and higher working capital requirements. The Government is expected to spend $90 billion on private sector capex. The private players such as Reliance, Adani, and JSW have also made significant efforts towards the capex investment. The common investment sectors are refineries and gas, renewable projects, airports, roads, mining, and other areas. Experts are indicating towards capex boom in the coming period which will further surge the demand for credit.

The path from Deleveraging to Leveraging: Since 2016, large and small industries focused on deleveraging. Deleveraging refers to the repayment of existing loans. RBI and Banks took strict measures for the revival of loans from various corporates. Earlier the prudent strategy was the corporates turned to bond markets where interest rates were quite low to take funds to meet up their repayment requirements. Now industries have turned to leverage and they are taking more advances from the banks to finance their requirements.

Now, what are the key points that need to be monitored closely?

The Resurgence of credit has been a harbinger of economic well-being giving rise to a higher standard of living and meeting up of consumption requirements for the retail sector and at the same time, meeting up most of the requirements for the industrial and service sector. The MSME sector has also been showing improvement in the amount of credit derived from banks which is further utilized in the development of the very sector.

Keeping in mind the current situation, the purpose of credit demand has changed for the better. Earlier, people pledged their gold, and corporates put their balance sheets at stake to fulfill their consumption and investment requirements. The borrowings were mostly induced by distressed borrowings. Now, consumer durables, the standard of living, and capital expenditure are major market players influencing the demand for advances. However, at the same time, this may give birth to a liquidity crisis for banks. During pre-pandemic times, the government prompted banks to infuse liquidity to meet the excess demand and banks had a robust surplus fund with them. The situation of surplus has now taken the form of a deficit and banks are forced to look for funds from interbank exchanges, RBI, and issuance of Certificates of deposit. The liquidity crisis can soon turn into a primary factor and the initiator of inflation. This situation poses a question about the sustainability of credit demand resurgence.

What are the RBI and government doing to address the situation?

We have witnessed no immediate step from the government to stabilize the credit situation and on top of it, the RBI seems to add fuel to the existing fire. The RBI has changed its status quo from net borrower to net lender. During the period immediately after the pandemic, RBI encouraged banks to park their surplus through auctioning variable Reverse Repo Rate (VRRR), but now the RBI is lending to banks to increase the flow of currency in the market. Apart from this, banks have increased the MCLR (marginal cost of fund-based lending rates) to 7.56% to attract fixed deposits from the public which can be further utilized to provide loans. Even though the credit situation has an appealing positivity because it is induced by diverse sectors and the probability of default by all sectors at one time is quite low, it needs to be kept under surveillance. Rational policies should be introduced to monitor and regulate the flow of credit.