Indian economy is at its weakest level in six years. Majorly due to the slowdown in credit growth rate. The interdependence between economic growth and credit expansion is inevitable. Despite the reduction of interest rates by Reserve bank of India (RBI) and tax benefits offered, there are no signs of economy recovering. This reflects the tightening of financial conditions of the nation.
Credit Growth shrinks to a Two Year Low
The recent reports by RBI showed that credit growth slowed to 8.74%. Nearly half the credit growth has dropped, depicting the lowest level in two years. This data stands true for all major banks of India. A chief economist, Madan Sabnavis suggested that this is a result of both reduced demand and supply. Even though retail lending activities have significant growth, lenders are cautious on consumer loans. Additionally, there has been only moderate growth in unsecured loans.
The MSME sector
The decrease in credit growth comes at a time when banks have cut interest rates to make borrowing easier. Supporting that, the credit rate has lowered by 3.85% in the MSME (Micro, Small and Medium Enterprises) sector. The medium enterprises faced a shrinkage of 1.8% while the micro and small enterprises shrank 4.4%.
NBFCs Issue
The collapse of infrastructure lending group IL&FS has dried up the funds in non- banking financial companies (NBFCs) sectors. Few are still active at a slow rate while rest are completely inactive. Furthermore, the banks are unable to win the market share emptied by NBFCs that accounted for 30% auto loan and 40% home loans. Since then the RBI has reduced the repo rate by 135 basis points.
RBI Addressing the situation
Addressing the issue, RBI has requested the customers to link loans to the external benchmark from 1st October. RBI believes that this would introduce transparency to the previous MCRL (Marginal Cost of Fund Based Lending Rate) system. Moreover, these changes would provide time to banks to adjust to their deposit interest rates that play a role in the credit rate. This step is expected to slow the rates, however, economists fear that this won’t help increase credit demand.