RBI’s effort in easing liquidity does not seem to be working. While bond and treasury yields have eased, companies, especially the mid and small sector, are being deprived of funds. The SME segment, which is the supplier of intermediate goods to bigger corporates and employs a large workforce, is unable to garner funds from banks.
Latest data coming out of the central bank on non-food credit shows that money flow to medium scale units has increased by only 0.6% in September 2012 as compared to 31.5% in the previous year. Micro and small industries have seen a better flow of 7%, though it is lower than last year’s 13.5%. But larger corporates continue to be favoured by banks, witnessing a 19.4% growth as against 23.6% in the previous year.
What’s worse is that on a year-to-date basis, banks have withdrawn money from the medium scale industry rather than lending to them.
The sector has seen a credit decline of 4.3% while micro and small scale sector has seen only 0.3% growth in credit. In the previous year, during the same period micro and small scale sector as well as medium scale sector witnessed a 6% increase in non-food credit. Larger corporates on the other hand have seen credit growth at 3.6%, lower than 8% in the previous year.
Overall, non-food credit supply in the economy has slowed down to 15.9% in September 2012 as compared to 18.7% a year ago. Not only is the money flow in the economy not entering the core sector, but is also slowing. This indicates an extended slowdown.
Though the central bank has done its part by increasing liquidity, money is being sucked away to personal banking. Numbers show that personal loans have seen credit flow increase by 16.6% on a base of 23.3% in the previous year. Add to this the credit card outstanding growth of 21.8%, which shows that people are living beyond their means or are unable to generate enough that they can spend.
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Agriculture and allied sector has seen credit supply increase by 21.3% as compared to 7.9% in the previous year. This can be a dangerous trend for the banking sector as we approach elections. Populist announcement like loan waivers, as has been used in the past, can ruin the system. Another cause of worry is that though agriculture sector has seen increased flow of credit over the years, there has been little improvement in output.
While the market has ignored the credit data as larger corporates have shown good quarterly numbers, one of the foundations of the economy - the small and medium sector industries – is gasping for air.