Credit growth has seen an unprecedented spike in recent weeks as companies reduced availing loans through commercial papers and sought working capital loans from banks instead after the Reserve Bank of India (RBI) drove short-term borrowing rates through the roof.
Bank credit picked up 17.1% as on August 23 from last year, according to the latest data available with the RBI. Credit growth was merely 14.23% before the central bank announced liquidity squeezing measures on July 15 to rein in the rupee. “Ever since short-term rates started climbing up, since mid-July, there has been a natural tendency for corporates to avail their credit limits. Some of the credit growth has been because of that,” said K Subrahmanyam, executive director at Union Bank of India.
Commercial paper rates for three months have jumped to about 11% from just 8.35% before July 15. RBI data shows that the wedge between credit growth and deposit growth is widening. Deposit growth was only 13%, the same RBI data showed.
But banks as well as economists say the trend of substituting external borrowing with bank credit may not last for a long time. This growth is unfortunately not a reflection of economic growth but a temporary phenomenon. And, once RBI rollbacks these measures, likelihood of which has increased, credit growth will again see a deceleration.
“This substitution and increased working capital requirement, due to rising cost pressures and weak demand, may support credit growth for some time, but given the ongoing demand destruction, is unsustainable,” said Nomura economist Sonal Varma. “We believe this demand for credit will fall sharply once this substitution phase passes.”
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