THE GIST of Editorial for UPSC Exams : 09 october 2019 (Trouble with credit (Mint))

Trouble with credit (Mint)

Mains Paper 3: Economy
Prelims level: Credit flows
Mains level: Highlights of the credit flows

Context

• The Monetary Policy Report of the Reserve Bank of India (RBI) paints a worrying picture of credit flows in the economy.

Highlights of the credit flows

• Between April and mid-September this year, the flow of funds to the commercial sector collapsed to Rs 90,995 crore, down from Rs 7.36 lakh crore over the same period last year.
• Non-food bank credit has declined.
• Flows from NBFCs have declined.
• Foreign flows have picked up during this period.
• Credit flows in the first half of the year tend to be subdued and pick up in the second half, the decline this time around compared to the previous year is staggering.

Reasons behind this decline

• The sharp decline appears to be due to a combination of two factors —
• A collapse in demand and
• Risk aversion.

Corporate investments

• An over-leveraged corporate sector is in the midst of a much needed deleveraging exercise. And in the current environment of subdued demand and low capacity utilisation rates, there is little incentive to launch fresh investments.

Banks

• On the other hand, banks appear to be reluctant to cut rates to boost lending. Instead, they are parking more funds in government securities and with the RBI.
• As the RBI report notes, banks have increased their SLR portfolios (statutory liquidity ratio), holding excess SLR of 6.9 per cent at the end of August 2019, as compared to 6.3 per cent at the end of March 2019, indicating a reluctance to lend.
• The shift in the liquidity stance from deficit to surplus mode has also not helped boost credit flow to the larger economy.
• It is also plausible that, in the face of growing economic uncertainty, banks have tightened credit norms, reducing those eligible for credit.

Crisis in NBFC

• The crisis in the NBFC segment has only deepened.
• Bank credit and the commercial paper market remaining shut for NBFCs, credit flow from NBFCs to the larger economy has suffered, the fallout of which is visible in the decline in household debt fueled consumption.

Conclusion

• A slowdown in economic activity will only exacerbate the situation, as stress on the repayment capacity of borrowers will increase the rise of default, making lenders even more cautious.
• Breaking out of this vicious cycle may be a long drawn out process. But the first step towards rebuilding trust, and addressing the stress in the financial sector in order to get credit flowing, should be to ensure a quick and orderly resolution of stressed NBFCs.

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Prelims Questions:

Q.1) Consider the following statements:
1. India has signed a loan agreement worth 400 million dollar with the World Bank to help treat and eliminate Tuberculosis from the country.
2. It will cover all states of India.

Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both 1 and 2
D. None

Answer: A
Mains Questions:
Q.1) Why the credit flow to commercial sector is worrying? What is the process to ensure a quick and orderly resolution of stressed NBFCs?