The Hindu Business Line : Reduction in cost of credit to users crucial

New Delhi, Apr 22 The monetary policy statement of the central bank for the current fiscal has not disappointed purists by sticking to its conventional stance of being too cautious in taking an overtly populist position, despite shrill call for relaxing policy rates from the Government side in the run-up to the policy with trade and industry chipping in tow to get easier credit access at affordable rates.

Wringing his hands helplessly, the RBI Governor, Dr D. Subbaro, in his maiden annual policy statement 2009-10 wryly remarked “given the erosion of the monetary policy transmission mechanism, there are concerns about when and to what extent monetary response, admittedly aggressive, will begin to have an impact on reviving credit flows and spurring aggregate demand”.

Be that as it may, as the apex bank said that its stance of monetary policy would broadly be to ensure “a policy regime that will enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path”.

Trade and industry might cry from rooftops that the commercial banking system down the line have not responded to policy rate cuts to match the aggressive easing by the apex bank. No wonder, non-food credit expansion during 2008-09 has decelerated from a peak of 29.4 per cent in October 2008 to 17.5 per cent by March 2009. At this latter level, it was lower than that of 23 per cent in 2007-08 as also the indicative projection of 24 per cent set in the Third quarter Review of January 2009.

Credit growth

If the drying up of overseas credit and spurt in credit demand for oil marketing companies made up higher domestic credit growth in April to October 2008, the subsequent slowdown in industrial growth, decline in commodity prices and drawdown of inventories by the corporates, moderation in the demand for credit by oil marketing companies coupled with lower credit expansion by private and foreign banks in the later period led to an overall deceleration in credit growth during 2008-09.

Now with signs of economic growth momentum none too encouraging for the current fiscal, will there be any appetite for credit from firms and commercial establishments unless the cost of credit to users is significantly reduced? Merely stating that “the Reserve Bank continues to maintain and will maintain ample liquidity in the system and it should be the endeavour of commercial banks to ensure that every creditworthy borrower is financed at a reasonable cost while, at the same time, ensuring that credit quality is maintained” does not carry conviction as long as the scheduled commercial banks have little clue as to how to price credit quality without being hoodwinked by the borrowers!

In fact, the commercial intelligence to price risk and set apart funds for the real sector requirements of the economy remain a difficult exercise for many a bank which finds increased safety in parking its funds with G-sec and other impregnable havens that yield next to nothing.

This not only makes commercial banking business unattractive but also adds to its transaction cost, besides depriving the users of credit a reasonable borrowing cost.

It is also interesting to note that the RBI has said the combined market borrowings of the Central and State governments in 2008-09 were nearly two and half times their net borrowings in 2007-08, thanks to the fiscal stimulus packages as also additional post-budget items of expenditure.

If the Government of the day both at the Centre and the States continues to live on borrowed funds longer, the commercial banking system in the country would be finding it an easier option to get locked their funds in such safe securities rather than take a calculated risk of lending to diverse borrowers across the real sector of the economy where the risk to return ratio is anybody’s guess. No wonder, growth impulses at best remain mere impulses without getting converted into development in the woeful absence of the fuel of credit!

In sum, as the central bank does not nudge the banking system by dint of being its supervisor or custodian, to respond to the real time concerns of growth pangs being acutely felt by every productive sector of the economy, the slowdown of the economy would be difficult to surmount.

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