The credit deceleration in India since 2013 could partly be attributed to a gradual worsening of asset quality, a Reserve Bank of India (RBI) report said. The growth rate in credit offtake has steeply declined to 5.8 per cent in November 2020, as against 14.2 per cent in 2013.
However, the accommodative stance of monetary policy and reduction in the policy repo rate (starting from 2019) helped cushion the credit deceleration, the RBI said. “In the absence of a sharp cut in the policy repo rate, the slowdown in credit growth would have been far more severe,” according to an RBI working paper on ‘Asset quality and credit channel of monetary policy transmission in India’.
The central bank has slashed policy repo rate by 350 basis points to 4 per cent now from 7.50 per cent in March 2013. “Other factors contributing to the slowdown of credit growth include a slowdown in economic activity and deposits,” the report said. However, the accommodative stance of monetary policy and reduction in the policy repo rate (starting from 2019) helped cushion the credit deceleration. After the asset quality review (AQR) since 2015, many hidden bad loans had surfaced, forcing the government to enact the Insolvency and Bankruptcy Code (IBC) for resolution of bad loans.
The RBI report said credit growth slowdown would have been bolstered to some extent, if banks had maintained higher levels of capital position. Therefore, for monetary policy actions to have their full impact on the credit channel, it is imperative that the asset quality concerns of banks are addressed and that their capital positions are strengthened, it said.
As per a banking source, high level of non-performing assets has prompted bankers to be cautious while extending loans to borrowers. With corporate loans becoming NPAs in large numbers, banks have now started focussing on retail loans. Despite the lockdown, layoffs and closure of many units in the wake of the Covid-19 pandemic, gross NPAs of 31 banks declined by Rs 43,848 crore to Rs 7,91,088 crore as of September 2020 from Rs 8,34,936 crore in June 2020 — a decline of 5.25 per cent in absolute terms as the central bank allowed relaxation in the computation of bad loans and announced a loan restructuring scheme.
Although, as a percentage of advances, there has been improvement in the gross NPA ratio in September at 7.7 per cent, compared to 8.2 per cent in June and 7.9 per cent in March. The RBI and analysts have warned against a spike in bad loans in the coming months. An increase (decrease) in policy rate by 100 basis points causes the credit to decline (increase) by 1.95 per cent with a lag of six quarters, validating the existence of a robust credit channel of monetary transmission in India, the paper said. The stressed asset ratio impacts credit growth negatively, suggesting that banks with higher stressed assets are forced to curtail their credit growth.
In a bank-dominated financial system such as India, the credit channel plays a critical role in transmitting monetary policy impulses to the credit market and from thereon to the real economy, the report said.
“In India, however, credit growth has slowed sharply in the recent period, even as the RBI has reduced the policy rate significantly. A wide divergence has also been observed in credit growth of public and private sector banks, suggesting that apart from common factors, some idiosyncratic factors are also at play,” the RBI said.
“The results of the paper suggest that the credit channel of monetary policy transmission is robust in India. Its efficacy, however, is impaired if there is a deterioration in asset quality but is reinforced by better capital position of banks,” it said. Controlling for asset quality, in the short-run, the credit channel of monetary transmission of public sector banks is stronger relative to that of private sector banks, it added.
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