Flow of funds to the commercial sector has declined by nearly Rs 94,000 crore (or around $19 billion) in the current financial year up to early January, as all foreign sources of funding, barring foreign direct investment (FDI), showed a sharp decline, said a report.
External commercial borrowing (ECB) and short-term credit from abroad, which met more than 20 per cent of India Inc’s credit needs in the 2007-08 fiscal, have contributed only 8.2 per cent of the financing needs (refer table).
However, bank credit has increased by nearly Rs 38,000 crore in the current fiscal, meeting 61 per cent of fund requirement for companies. But it was not enough to plug the gap left by other sources — both domestic and foreign — which fell by more than Rs 1.31 lakh crore (or $26.8 billion).
“The sharp increase in credit growth in October/November was mostly due to the drying up of non-bank source of funding and increased rupee loans compensating for the drying up of US dollar trade credit,” Pranjul Bhandari and Tushar Poddar, analysts with Goldman Sachs, wrote in a research report released today.
After Lehman Brothers filed for bankruptcy last year, inter-bank lending especially in US and Europe reduced significantly as financial institutions became risk-averse. This also increased the risk premium for Indian companies borrowing abroad, and in most cases, overseas loan was not available.
Even within the commercial banks, it is the state-owned lenders that have shown a rapid increase in credit. Credit deployment of private banks has shrunk. “Credit to the agricultural and services sectors have remained largely unchanged, while the proportion of loans for personal use has declined due to falling housing loans,” said the report, which analysed the latest data released by the Reserve Bank of India (RBI).
In its prediction for the next financial year, Goldman Sachs said that bank credit will play a dominant role in the flow of funds to the corporate sector.
| TAP RUNS DRY | ||||
| 2007-08 | 2008-09 | |||
| $ bn | % of total | $ bn | % of total | |
| Credit by commercial banks (A) | 56 | 45 | 63.7 | 60.5 |
| Flow from other major sources (B) | 68 | 55 | 41.6 | 39.5 |
| Public issues by non-financial entities | 8.6 | 6.9 | 2.9 | 2.8 |
| Gross private placements by non-finance entities | 9 | 6.9 | 2.9 | 2.8 |
| ECB | 15.7 | 12.6 | 6 | 5.7 |
| Short-term credit from abroad | 10.4 | 8.3 | 2.6 | 2.5 |
| FDI | 4.8 | 3.8 | 11.6 | 11.1 |
| Total (A + B) | 124.5 | 100 | 105.2 | 100 |
“We expect credit demand to slow significantly, despite falling interest rates, as activity continues to weaken. Going forward, we also expect all forms of external flows, except FDI, to remain sluggish given the challenging global macro environment”.
US, Japan and European Union that contribute more than half of global Gross Domestic Product (GDP) are in recession and experts don’t predict a faster turnaround.