One of the features of the last fiscal's rather mixed performance in industrial output and economic growth (fourth quarter GDP closing lower at 7.8 per cent) was the consistent expansion of bank credit. After hitting 24 per cent in December, it tapered off to around 21 per cent but stayed around that level, more or less fulfilling the Reserve Bank of India's expectations. It goes without saying that non-food credit grew at a faster clip than food credit but the fact recorded in the central bank's April macro-economic review of overall brisk bank lending cannot be denied.
But one can certainly question the character of that lending or, in other words, the sector-wise distribution of bank credit growth over the four quarters. The RBI has released data to show that bank credit expansion tilted heavily towards Services, and within that to two segments — non-banking financial companies (NBFCs) and commercial real estate. On a year-on-year basis to March 2011, credit to the former witnessed an expansion of almost 55 per cent against 17 per cent for the 12 months ending March 2010; commercial real estate, that had seen a contraction in the previous period, was favoured with a growth of 21 per cent — one of the most dramatic spikes in bank credit. Other star services were equally blessed; for instance, ‘tourism, hotels and restaurants' maintained their record of 42 per cent, followed by ‘transport operators' (24 per cent) and ‘computer software' (20 per cent). Banks did not view industrial sectors with as much enthusiasm; credit to industry did grow, but more to the medium and small sectors with credit to large industry actually declining three percentage points to 24 per cent. One might welcome this special dispensation to the medium and small enterprise but, set against the overall deployment pattern, the character of lending in the last year cannot but be viewed with some apprehension. On a surface consideration, it might seem obvious for banks to lend more to star sectors and within that to real estate and NBFCs, that further fund activity. But credit growth built on services is often on shaky foundation: rising interest rates and input costs and payment defaults can slow real estate (and NBFCs) down from both demand and supply ends. Sensitive to interest rate variations, such sectors exhibit more volatility than manufacturing and industry at large.
The deployment of bank credit in the last fiscal reflects the pattern of economic growth but that is reason enough for policymakers to think about ways of changing the flow towards more sustaining sectors such as core industries.