Low credit growth means risk aversion continues to thrive among India’s lenders. However, it may also mean that demand for loans remains low as well, especially as the COVID-19 case tally continues to rise.
KEY HIGHLIGHTS
- Lower interest rates will, typically, attract more borrowers, ultimately acting as a stimulant to business activity and increased output
- For the fortnight that ended August 28, the year-on-year growth in credit stood at 5.5 per cent – at around the same pace as seen in the previous fortnight
- At the end of August 2019, credit growth stood at 10.2 per cent
In response to the COVID-19 outbreak, the Reserve Bank of India has, over the last few months, rolled out a slew of measures aimed at boosting liquidity and increasing the resilience of India’s financial markets. With the economy already reeling from slumped demand before the pandemic struck, the RBI resorted to slashing interest rates that currently stand at a low of four per cent.
The rationale behind lowering interest rates is simple enough. Economic growth goes hand-in-hand with the propensity of banks to lend. Lower interest rates will, typically, attract more borrowers, ultimately acting as a stimulant to business activity and increased output.
However, according to a recent report published by the State Bank of India, there is a point at which the RBI’s monetary policy lever of interest rate manipulation ends up having a reverse effect.
That is to say there comes a point when lowering interest rates no longer stimulates the market, but, in fact, spurs lenders to shut up shop and stop issuing loans. This point arises when interest rates fall so low that profitability of banks come under threat.
The SBI report pegs this interest rate at 3.5 per cent, dangerously close to where interest rates currently lie. In such a scenario, banks grow extremely cautious of issuing loans, beging indulging in cherry-picking, and start investing their money in safe assets. This, invariably, has a marked effect on credit growth.
The latest data released by the RBI indicates that this phenomenon may, in fact, be what is currently taking place, suggesting that its primary monetary policy measure has failed to have its anticipated effect. As per the RBI, bank credit has shrunk by 0.5 per cent or Rs 54,000 crore in August to stand at Rs 102.11 trillion (August 28). As of July 31, this sum was Rs 102.65 trillion.
Importantly, for the fortnight that ended August 28, the year-on-year growth in credit stood at 5.5 per cent – at around the same pace as seen in the previous fortnight. However, compared to the same period last year, it was markedly lower. At the end of August 2019, credit growth stood at 10.2 per cent.
What this means is that a sentiment of risk aversion continues to thrive among India’s lenders. However, it may also mean that demand for loans remains low as well, especially given India’s failing response to the COVID-19 threat.
India’s daily case numbers continue to reach new heights suggesting that the nation is still far from reaching its peak – something that every other country among the top 20 worst-affected have already achieved. Given the continued uncertainty and fears that further lockdowns may be implemented, India’s households and businesses do not appear to be keen to take on any further risk.
