The Indian economy is being held back by a large squeeze in credit availability emanating from the NBFCs
Mumbai, October 24: The Indian economy is being held back by a large squeeze in credit availability emanating from the non-bank financial companies (NBFCs), Fitch Ratings says. Their economics team's latest chart of the month states, assuming the sluggish pace of lending is maintained throughout the year, total new lending will amount to only 6.6 per cent of GDP in the fiscal year 2019-2020, down from 9.5 per cent in the previous fiscal year.
This comes just weeks after the Reserve Bank of India (RBI) slashed its GDP growth forecast to 6.1 per cent from 6.9 per cent for the financial year 2019-20. The lower growth prospects predicted by the Central bank follow negative output results from various key sectors of the economy. Besides, global trade tensions, mainly the tariff war between the United States and China have also impacted the emerging markets economy.
Fitch Ratings states, “The Indian economy decelerated for the 5th consecutive quarter in 2Q19, with GDP expanding by a meager 5 per cent Y-O-Y, down from 8 per cent recorded a year earlier. This is the lowest growth outturn since 2013. Weakness has been fairly broad-based, with both domestic spending and external demand losing momentum.”
While an array of factors have contributed to the Indian slowdown, including a downturn in world trade, Fitch believes the severe credit squeeze has taken a heavy toll. NBFCs have faced a severe tightening of funding conditions over the past year and a half. They have in turn sharply reduced the supply of credit to the commercial sector. The auto and real estate sectors have been particularly hit by NBFC credit rationing.
Data from the Reserve Bank of India (RBI) show that the flow of new lending from non-bank sources was down 60 per cent year on year between April and September. “In contrast, banks' lending has held up well in recent months, mitigating some of the overall credit supply shortfall. However, bank lending could not prevent a sizeable credit crunch in the first half of 2019,” the rating agency said in its report.
Fitch also notes the success of the inflation-targeting framework adopted by the RBI in 2016 in reducing inflation has been associated with sharply rising real lending interest rates since mid-2018. While the RBI has been able to lower interest rates, policy rate cuts have not been fully passed through to new rupee loans. As a result, inflation-adjusted (real) borrowing costs have increased, weighing on credit demand.
The lack of monetary policy transmission in India derives from the combination of high public-sponsored deposit rates against a backdrop of stretched banks' balance sheets. “Indeed, the competition from public schemes, which offer more attractive deposit rates to customers, have made banks reluctant to cut deposit rates,” it said.
Banks have maintained elevated lending rates to preserve their margins amid high funding costs.