Resource flow to commercial sector drops 28%

Macroeconomic and Monetary Developments: Second Quarter Review 2009-10

Absence of private and foreign banks and general slowdown behind poor show.

The flow of resources to the commercial sector fell by 27.8 per cent to Rs 337,991 crore during the first half of the current financial year, primarily due to lower non-food credit flow.

According to the latest data released by the Reserve Bank of India (RBI), the main reason was a 50.75 per cent decline in non-food credit growth to Rs 1,18,257 crore during the first half of the year, as against Rs 2,40,092 crore during April-September 2008.

The data showed that absence of private and foreign banks from the market was one of the main reasons.

Though overall credit growth went up by 10.8 per cent during the year up to October 9, it was a public sector bank-led show. While the growth rate for public sector banks more than halved from 32.7 per cent during the year up to October 10 last year to 15.7 per cent in the year up to October 9 this year, they were still better off than private banks (2.5 per cent this year versus 19.7 per cent in the year up to October 10, 2008) and foreign banks, which witnessed a 15.9 per cent contraction (against 32.9 per cent increase a year ago).

The growth in lending to industry fell (see table), but bankers said this was more due to lack of demand from companies.

With RBI and the government pushing for the infrastructure sector, the loan flow to this segment grew 44.7 per cent during the year up to August 2009. But lending to construction, gems and jewellery, engineering, chemicals and chemical products, and iron and steel dropped due to poor demand and the economic slowdown.

A drop in crude petroleum prices also meant that the year-on-year growth in lending to petroleum, coal and nuclear fuels sectors fell to 3.5 per cent, as against an increase of 90.7 per cent in the year up to August 2008.

The growth in retail loans dropped to 2.3 per cent for the year up to August 28, as against 14.5 per cent a year ago, due to banks’ reluctance to lend in the face of higher delinquency levels.

While it was no secret that RBI was worried over the decelerating trend in credit growth, it said the contraction seen in consumer durable finance and credit card outstandings pointed to a sharp decline in private consumption demand.

What could be a cause for concern for RBI would be the growth in loans to commercial real estate, which rose at 41.5 per cent, 160 basis points lower than the year-ago rate.

But in case of the agriculture sector, the year-on-year growth up to August 28 was estimated at 25.6 per cent, as against 18.6 per cent a year ago, while for SMEs, the growth accelerated to 27.4 per cent this year, as against 21.1 per cent a year ago.

“Over the last one year, banks have shifted their focus to agriculture because of low demand by companies,” said a senior bank executive at a public sector bank.

“Except for a brief period, banks have been lending to micro and small enterprises. Demand by this segment for opening new units and working capital was always available,” said Parthasarathi Mukherji, Axis Bank President (Corporate Banking).