Muted credit growth becoming a risk: RBI

Industrial credit growth dipped to negative in Oct 2016 and only moved to nil growth in August year, according to RBI data

The Reserve Bank of India’s (RBI’s) Financial Stability Report for December has stated that risks to growth are emanating from the “on-going deleveraging” phenomenon in the heavily indebted parts of the corporate sector, as well as from muted credit growth in public sector banks (PSBs). 

The report cites that thin capital buffers of PSBs causes lower investment activity in the economy, as some major sectors have witnessed a decline in credit growth over the past two years. Industrial credit growth dipped to negative in October 2016 and only moved to nil growth in August year, according to the RBI data. 

In terms of the composition, engineering, infrastructure and textile have experienced negative credit growth from August 2016. This, however, recovered in August this year. Only the construction sector has had positive credit growth since the start of 2016, despite volatility in the levels of credit available. 

The share of gross fixed capital formation (GFCF) as a percentage of the gross domestic product (GDP) has declined since 2011. In 2011-12 the share of GFCF in GDP was around 34.3%; this declined to 31% in 2014-15; in 2016-17, it was only 29.5%.

Quality of government expenditure, the RBI’s report notes, has improved in recent years, despite the fact that public sector utilities (PSUs) pushing their leverage ratios in lieu of increased investments.

The debt-coverage ratio (long-term debt to earnings before interest and tax) for power and manufacturing PSUs, rose at an accelerated rate from just above 2 in March 2008, to peak at nearly 8 in March 2016. For central PSUs and oil and mining PSUs, the debt-coverage ratio remained somewhat stable between 2008 and 2017.

Merchandise exports may see a recovery in growth, after experiencing negative growth for seven consecutive quarters. Exports have grown since Q3 of 2016-17, while merchandise import growth has converged according to the data, the RBI has looked at. The trade deficit has improved in Q2 2017-18 on account of higher growth in imports vis-à-vis exports. A rebound in oil prices can reduce the external sector’s resilience.

Unprecedented fund flows to equity and debt mutual funds has occurred, in the wake of demonetisations’ effect of increasing the banking sectors’ liquidity position. The highest level of Foreign Portfolio Investment (FPI) equity flows went to Russia, followed by India, during January and October 2017.