RBI reveals: Weak investment activity, stalled projects, grim profit outlook leads to lowest credit growth since 1994

Non-food credit sector-wise

In an indirect admission that India's economy has been badly impacted by demonetisation and mismanagement, the Reserve Bank of India (RBI) has said that the growth in non-food credit -- extended by scheduled commercial banks to all other customers except the Food Corporation of India -- "reached a low of 5.8 per cent at end-March 2017, the lowest since 1994-95", even as underlining, the deceleration has continued thereafter.
The RBI's Annual Report, released early this week, further admits, "During 2017-18 (up to June 2017), overall credit slowdown has persisted with most sectors witnessing deceleration or contraction. While credit to industry continued to contract, credit growth to agriculture slowed down significantly to 7.5 per cent in June 2017 from 13.8 per cent in the corresponding period of the previous year.
The report says, "Credit to all major sectors, barring services, decelerated/contracted during 2016-17. Credit to agriculture slowed down to 12.4 per cent from 15.3 per cent in the previous year. Credit to industry, particularly infrastructure, food processing and iron and steel segments, has been contracting since October 2016. Credit to industry contracted by 1.9 per cent during 2016-17 in contrast to a growth of 2.7 per cent in the previous year."
It adds, "Credit to infrastructure (which accounts for about one-third of the outstanding bank credit to industry) contracted by 6.1 per cent in 2016-17... Within infrastructure, credit growth contracted/decelerated in respect of all major segments such as power, telecommunication and roads. Credit to textiles and engineering goods also slowed."
The only sectors which showed acceleration in credit growth are "fertilisers, petro-chemicals and construction activity", the report says, adding, "The overall contraction in credit to industry was due to the inter-play of several factors."
These were, it says, (1) investment activity has been weak in recent years, which has severely impacted credit offtake; and (2) within industry, several sector-specific factors contributed to contraction in credit.
Giving sector-wise details, the report states, "the power sector, which accounts for about 58 per cent of the outstanding credit to infrastructure, has been facing hurdles like stalled projects, operational inefficiencies and high outstanding debt."
As for those telecommunication industries, the report says, these were "experiencing declining revenue and a grim profit outlook due to technological innovations and stiff competition among the service providers."
Then, it adds, "The iron and steel sector was stressed due to weak prices and stiff international competition."

Non-food credit: Details

Giving a list of other factors which "drove down credit growth despite softening of lending rates", the report says, these were subdued state of economic activity, risk aversion in the banking sector with a legacy of non-performing assets (NPAs), capital adequacy requirements, and "disintermediation via increasing recourse to market-based instruments, such as commercial papers (CPs) and corporate bonds."
The report further says, "Credit growth was also impacted by one-off/statistical factors such as loan write-offs, substitution of bank credit by UDAY bonds (floated by the Government of India as financial turnaround and revival package for electricity distribution companies), loan repayment by use of specified bank notes (SBNs) and banks’ pre-occupation with exchange of notes/deposits following demonetisation."
Giving details of credit growth slowdown, the report says, the "real credit growth showed a sharp deceleration to 1.8 per cent from 5.8 per cent a year ago", adding, "In terms of intra-year variations, non-food credit flow dipped albeit a little more than usual in the first quarter of 2016-17 before posting a sharp recovery in the next quarter – a contrast to its customary behaviour."
Noting that non-food credit flows had already begun receding early in the financial year, the report states, "A declining momentum got entrenched in the aftermath of demonetisation" of November 2016.

And though it recovered somewhat by the fourth quarter of 2016-17, it just reflected the "usual year-end window dressing", the report says, "During 2017-18 (up to June 23, 2017), the non-food credit growth remained lower at 6.7 per cent when compared with the growth of 9.3 per cent in the corresponding period of the previous year."

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