India struggles to revive credit growth as economy stumbles

New measures by New Delhi designed to encourage banks to boost lending and take more risks are unlikely to revive anaemic credit growth in Asia’s third-biggest economy, industry observers have warned.
The Reserve Bank of India on Thursday cut its benchmark cash reserve ratio, extended a relaxation of lending rules and introduced a $14bn facility that allows commercial lenders to borrow more cheaply from the central bank.
But analysts said the steps to shore up liquidity will not jump-start credit growth, which will slow to 6.5 per cent in the year ending in March, down from 13.3 per cent in the previous year, according to ICRA, a rating agency.
The credit squeeze comes as India’s previously fast-growing economy suffers its worst slowdown in more than a decade.
Indian GDP is forecast to expand just 5 per cent in the year to March 31 in what would be a setback for prime minister Narendra Modi, who came into office promising to realise India’s potential as a global superpower.
Without sufficient credit from banks, companies will struggle to grow, defaults will rise and economic growth will slow further.
“Banks are becoming more risk averse,” said Ashish Gupta, head of Indian equity research at Credit Suisse. “There are a lot of headwinds for the economy and particularly for the financial sector, which is not growing and credit is not flowing. It’s difficult for the economy to recover.”
Indian banks are exercising extreme caution in their lending, after authorities cracked down on non-performing loans. Years of profligate lending led to a build-up of bad debt and the spectacular collapse of shadow bank IL&FS two years ago.
Credit expansion has stalled despite the central bank pumping additional liquidity into the financial system since last year as it sought to resuscitate growth. The RBI has progressively cut rates to a near decade low of 5.15 per cent.
Sanjay Mookim, India equities strategist at Bank of America, said New Delhi needed to pressure banks to lend. “Someone needs to wield a stick and get banks to take a little more risk,” he said. Mr Mookim added that small and medium-sized companies were cut off from credit access as banks preferred to lend only to large businesses.
But other analysts pointed out that some companies were reluctant to borrow money, given the deteriorating health of the Indian economy.
“The RBI is addressing the supply side by incentivising banks but the demand has to come back,” said Anil Gupta, vice-president of financial sector ratings at ICRA, a local affiliate of Moody’s. “I don’t think credit availability is the main issue,” he said. “The banks are there to lend but people aren’t feeling confident.”
Businesses are holding back from major investments in India as a slowdown enters its third year against a backdrop of falling consumption and rising unemployment.
India’s treatment of foreign businesses is also coming under scrutiny. Vodafone Idea, the UK telecoms group’s India joint venture, has warned it may have to “shut shop” over a multibillion dollar charge levelled by India’s Supreme Court.
“There is limited confidence, having seen what is happening to large-scale foreign investments, people are wary,” said Ramesh Venkataraman, a London-based private equity investor. “Foreign investors are sitting on the sidelines.”
Investors say the Indian government needs to do much more to boost credit growth and jump-start the economy.
“Honestly, a lot more needs to be done, we are really facing a severe slowdown on the ground,” said Abhishek Loonker, director at private equity investor Ascent Capital. “We have to keep our fingers crossed that something is coming down the pipeline. Some out-of-the-box thinking is required.”