Growth rate of banking sector loans is slowing. So, is it something to worry or be happy about? That depends on where you stand. If you’re a regulator, you should be smiling as your actions are working. But if you’re a businessman, you’re standing at the other end. When credit is an economy’s oxygen, its reduction isn’t good for growth. But the regulator looks towards financial stability to ensure growth rates are sustained. Non-food credit is down to 13% this September from 20% a year earlier. Loans to NBFCs, seen as the last-mile connectors, are down to 13.7% from 25.4%. Personal loans have been the worst hit. Their decline in growth rates could be attributed to regulatory measures.
RBI purportedly knows more than industry. When it has come up with the rules, data would have probably pointed to some risk building up. The regulator has cited many such build-ups from vulnerable groups being peddled multiple loans, exposing them to defaults. But attempts to correct some misalignment in one section of the financial system could spill over into others. This slowing loan growth rate may be coinciding when GoI is also tightening its purse-strings.
A rule of thumb is credit growth should be about 1½ times the nominal growth of the economy. If the economy is expanding at 7% with inflation at 5%, the loans growth should be about 18%. The central bank, in its wisdom, may have tightened rules under many segments, and proposed a high liquidity coverage ratio (LCR) to safeguard against bank runs. But these could have unintended consequences on availability of funds for productive purposes. RBI, in the interest of financial stability, has to ensure that it doesn’t ‘overtighten’, which could have adverse effects on the economy.
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