Repo rate-market rate of interest link diluted impact of RBI policy

Inadequate credit flow from commercial banks and non-banking financial companies (NBFCs) to industry has frequently been cited as a major constraint to growth. While the flow has been reported to be lower than requirement, the cost of credit has also been on the rise. RBI, the primary supplier of credit, has recently endeavoured to bring down the repo rate in successive attempts.

During February and December 2019, the repo rate was brought down by 135 basis points from 6.5% to 5.15%. However, the actual lending rate by banks to end-users did not reflect the same buoyancy.

The market lending rate (basic rate between 8.95-9.40%) fluctuating between 11.5% and 12% decreased by an average 44 bps only, as RBI does not intervene in fixing the market rate of interest by commercial banks. In favour of the banks, it may be argued that this partial passing off was necessary to compensate the banks of the increasing cost of operations and services. As a result, the transmission impact of repo rate cut was much lower than what was envisaged. This phenomenon is nothing new in Indian economy.

Earlier, excise duty reduction on a specific product, in many cases, was not proportionately passed on to end-user with little impact on price of the product which was the basic intention of excise duty fall.
One must acknowledge that weakening of the direct link between repo rate and market rate of interest has somewhat diluted the impact of policy intervention by RBI in lowering the cost of credit by households for the purchase of property and consumer goods, including vehicles, and by SMEs and large players in bringing down the cost of working capital and capacity creation.

Latest data reveal the total non-food credit (measured by total loans outstanding) by the commercial scheduled banks has risen by 8.3% in October 2019 compared to the previous year.

Food credit has gone up by around 27% as on October 2019. Of the non-food credit, the loans to industry at `27.9 lakh crore have gone up by only 3.4% during the period. The credits to mining and iron & steel sectors have both decreased. While for mining it is lower by 4.1%, for iron & steel credit stands at `2.68 lakh crore, which dropped by nearly 7% compared to the previous year. For other metals, outstanding loans decreased by 7.7%.

On the other hand, the credit to automobile, construction & roads, total infrastructure sectors, outstanding credit amount has increased by 4-8% which is substantial under the current credit crunch period.

Reason for the above skewed distribution of bank credits among different industrial segments is on account of metal sector being one of the highest in total outstanding loans that have been declared as non-performing assets. Of the total NPAs by metal sector, the steel sector alone accounts for nearly 76% which has made banks credit averse to these sectors. The credit goes to the government to have introduced the Insolvency and Bankruptcy Code (IBC) with appropriate changes and made it an effective tool to recover outstanding credits by the defaulting units by selling it off to the new owners through a transparent auction route. In the recent

Essar Steel case, the emergence of ArcelorMittal (60%) and Nippon Steel (40%) as the successful bidder would bring in good technology and better work practices, matching international standards.

Apart from leveraging healthy competition in the domestic market, it would contribute to growth of steel exports from India. The resolution of outstanding bank loans by Bhusan Steel and Power and Usha Martin by Tata Steel in taking control of these two ailing units and the smooth resolution of loans and ownership of Monnet Ispat and Bhusan Steel by JSW Steel are glorious examples of Indian large steel players consolidating and strengthening their positions as well as helping the financial sector out of the scourge of outstanding bank loans. These efforts are expected to go a long way in removing the risk aversion by commercial banks in extending credit to iron and steel sector.

Credit growth by banks to the micro and small enterprises has gone down marginally by 1.4%, while for the medium enterprises, it has risen by 1.2% and for the large players growth rate in credit happened to be more than 4%.

The sectoral break-up of non-food credit throws up an interesting fact that loans to non-banking financial companies (under service sector) at Rs 7.13 lakh crore has gone up a substantial 27% in October 2019 compared to the previous year.

In the personal loan category, consumer durable goods sector has been extended credit by more than 70% while the outstanding credit for housing sector stands at `12.7 lakh crore which is 19.4% higher than last year and vehicle loans stand at Rs 2.07 lakh crore (5% more than last year).

Sectoral growth trend and health influenced by appropriate policy interventions by the government would thus continue to be the primary determinants of credit flows to the sector.

DG, Institute of Steel Development & Growth

(Views expressed are personal)