Uneven credit flow across firms/sectors together with unbalanced use of funds by firms leads to cumulative imbalances in the working of both the financial and real sectors.
Sharp increases in large loans and a steady decline in the share of mid-size loans during 2000s have contributed to the present growth concerns.
According to Sudden Stop theory of Prof. G. Calvo, Columbia University, sharp changes in credit composition in favour of large firms and crowding out of SMEs (small and medium enterprises) from the credit market can lead to liquidity crisis for the sector, affecting output, employment and capital expenditure.
Bank credit, size-wise
An analysis of bank credit limit outstanding over 1991-2011 shows that the share of mid-size credit bucket (Rs 25 lakh to Rs 10 crore) has been declining since FY 1999, whereas there is an appreciable increase in loans between Rs 2 lakh and Rs 25 lakh and a surge in credit flows above Rs 25 crore (see chart).
Their respective shares have increased from 13.1 per cent and 19.9 per cent in end-March 1999 to 17.3 per cent and 47.3 per cent in end-March 2011, respectively.
During FY 2005-11, the annual average share of very small (Rs 2-25 lakh) and large (Rs 25 lakh to Rs 10 crore) credit buckets were the same at about 20 per cent each.
However, in FY 1998 the share of Rs 25 lakh to Rs 10 crore loan category was almost thrice that of the Rs 2-25 lakh segment.
Even the share of the Rs 10-25 crore segment declined from 9.2 per cent in 1999 to 7.7 per cent in 2011.
turnaround
Crowding out of a very large and crucial mid-segment, including SMEs (Rs 25 lakh to Rs 10 crore), from bank credit has systemic implications in terms of output, employment and capex.
This turnaround started since the late 1990s.
In fact, the share of Rs 2-25 lakh credit buckets fell marginally till late 1990s, whereas the Rs 25 lakh to Rs 10 crore segment increased marginally till the late 1990s.
It appears that the share of the Rs 2-25 lakh credit category increased due to spurt in housing, auto, education, credit card, personal, and agricultural loans.
Another reason could be availability of collateral for small loans, whereas it is difficult to get adequate collateral for medium-size loans.
A significant and steady decline in much of mid-size credit class has implication for capital expenditure (capex), production and productivity.
spurt in credit
The credit-rush to highly-rated corporates, including unsecured loans and extra credit beyond productive requirements, at low rates is widely prevalent.
The spurt in credit to large firms with low capex and highly deficient redistribution of credit by them to MSMEs through the trade credit channel have resulted into greater financialisation of large corporates.
There is negative relationship between financialisation and capex.
This has crucial implications in terms of liquidity, investment, output, employment and growth opportunities across firms/sectors.
A comparative analysis of the RBI’s annual study of financials of non-government, non-financial public limited companies during the decade of 2000s over the decade of 1990s show a growing financialisation process in corporate world during 2000s.
The annual average share of investment, cash and bank balances, loans and advances in total assets have increased by 91 per cent, 83 per cent and 17 per cent, respectively, during 2000s over 1990s.
Corporates’ fixed deposits increased by 269 per cent. These show corporates have become significant lenders/investors themselves.
At the same time the share of production catalysts such as net fixed assets, plant and machinery, inventories, sundry debtors in total assets have declined during 2000s vis-à-vis the 1990s.
Further, while the corporate sector was a net receiver of trade credit during 2000s it was net supplier of trade credit in the 1990s [Table 1].
Both trade credit and bank credit composition have moved in favour of large firms.
There is crowding out of SMEs.
Decline in plough-back of funds by the corporates into business activities affects overall market liquidity.
Large corporates’ cash-and-carry sales policy reduces availability of trade credit to MSMEs, though the World Bank advocates that large firms with easy access to bank credit/capital market play an important role in credit redistribution to SMEs via the trade-credit channel.
Reversal of this role aggravates liquidity position for a majority of credit-constrained MSMEs.
All these have serious implications for the India growth story.
(The author is Deputy General Manager, SIDBI, Mumbai. The views are personal.)