Don't blame banks for not lending: Busines Standard: 7th March 2009

Banks have been doing a good job on the lending side in a prudential manner and India Inc should not really be complaining too much .
A question that is being raised quite often now is that banks are not lending much to industry, which is one of the reasons for low growth. Bank lending has two aspects, the first relates to the willingness to lend, and the other, to the cost of credit. That is the picture presented by industry. On the other hand, banks aver that they have been lending sufficient quantities of funds to the corporate sector, though the cost may be high. The cost factor is another issue and is not the point for discussion here. The purpose is to explore the story of the quantum of credit being provided by banks and whether or not industry has a valid grievance.
Any such analysis must also take into account the fact that banks are commercial organisations and have a right to make profits just as much as industry. Further, they also need to follow prudential norms relating to capital adequacy and quality of assets. Therefore, they should be lending to sectors where there is strong growth taking place and there is less probability of assets turning unsatisfactory.
The first point that can be made is that growth in bank credit has slowed down from 14.5 per cent in the first 10 months of FY08 to 11.6 per cent in FY09. In absolute terms, the increment is around Rs 2.74 lakh crore as against Rs 2.79 lakh crore last year, which is still better than the decline in incremental deposits during this time period. Unfortunately, the data on sectoral distribution of credit comes in with a lag and hence makes a meaningful discussion slightly difficult. However, RBI has provided data prior to the last policy for the sectoral allocation for the nine-month period till December. These figures indicate that the corporate sector should not be complaining as growth on a year-on-year basis was 30.2 per cent as against 24.9 per cent last year. In absolute terms, incremental credit to industry was higher by Rs 2.36 lakh crore as against Rs 1.56 lakh crore last year. If the petroleum sector is excluded, which is a common issue that is raised, incremental credit would still be Rs 1.94 lakh crore as against Rs 1.51 lakh crore. In fact, the sectors which bore the brunt of lower growth in credit were the priority sector and mortgages, where there was a decline in growth rate. Yes, the small-scale sector was also affected, though the medium and large enterprises had witnessed a swift growth in credit.
One must remember that this period was associated with the financial crisis in the US, and there were also considerable layoffs in the corporate world. And more importantly, demand was down, which meant that industrial growth was sluggish at 3.2 per cent for this time period. In this context, the share of sectors in total credit to the industrial sector can be juxtaposed with growth scenarios to discern a pattern.
From the table, it appears that there is a direct linkage between sector performance and the credit that is being disbursed. The industries that are growing, or rather doing better than the industry average, have registered high growth in credit and maintained their share in total credit. The engineering, automobile and metals segments, which have grown better than the industry average, have maintained their shares in credit. Banks this way have been cognisant of the quality of assets and have channeled funds to the growing sectors. Chemicals and metal products, which have witnessed a slowdown, have still witnessed a higher incremental share in credit. The sectors that have registered lower growth, such as food processing and textiles, have witnessed a fall in incremental share this year.
The petroleum sector has, however, taken the largest share of incremental credit, which is understandable given that the oil companies had to borrow more because of the high price regime till September-October. Infrastructure credit has also increased rapidly and its share has increased in total credit, which is a good sign as this means that this particular segment has little reason to complain. Therefore, it is possible to conclude that industry as a whole has got credit commensurate to the growth tendency shown.
What about the other sectors? Overall bank credit to the personal segment has declined with the share in incremental credit during this time period being 14.7 per cent as against an average of 23 per cent in total credit outstanding. Housing loans had a share of just 4.5 per cent. Here the reasons could be on both sides. Banks have raised interest rates given the possible threat of higher NPAs in the midst of an economic downturn. The demand for such loans has also dropped, given the layoffs and pay cuts seen in the private sector. Further, with the stock market down, there is a direct slowdown in the purchase of houses as such gains are normally used for such purchases. Surprisingly, the share of credit cards had gone up from an average of 1.2 per cent to 2.5 per cent on the incremental credit this year. Banks have also lent a larger share to the real estate sector with the increment being 5.1 per cent over an average of 3.1 per cent.
All this shows that banks have been doing a good job on the lending side in a prudential manner. India Inc should not really be complaining too much, though it may have an issue on interest rates being high. But then, pricing is a commercial decision which has to be taken by banks, just as industry fixes its own prices based on its own commercial judgement. Therefore, any such argument is more academic in nature.