Bank credit to the industrial sector, which continued at an elevated rate of over 20 per cent on an average until four years ago and was in double digits until the month of July 2014, has slipped into the negative in August 2016 — the first time it has done so in at least a decade.

For the month of August 2016, the loan outstanding of scheduled commercial banks to the industrial sector contracted by 0.2 per cent.

While it stood at Rs 26,23,800 crore in August 2015, it fell 0.2 per cent to Rs 26,18,100 crore, according to Reserve Bank of India estimates.

If industrial credit growth was one of the concerns cited by the central bank in its monetary policy statement earlier this month, the contraction in August after a steady tapering of growth reaffirms the red flags raised by the RBI.

In fact, in August, gross bank credit expanded by 7.6 per cent, down from 9.5 per cent in January 2016. While industrial credit growth steadily declined from 5.6 per cent to (-) 0.2 per cent between January 2016 and August 2016, credit in the other three sectors — services, personal loans, agriculture and allied activities — has grown in double digits.

Economists say this contraction reflects high unutilised capacities in industrial units and investments not taking place. “The demand in the economy over the last couple of years has come down to a level that capacity utilisations are at around 75 per cent. In such a scenario, no investor will invest and I don’t think a cut in interest rate can fuel investment,” said D K Pant, Chief Economist at India Ratings, a unit of Fitch Ratings.

While bank debt fuelled the rise in corporate leverage steadily from 2005 to 2011 and bank lending to the industrial sector continued at over 20 per cent until the fiscal ending March 2012, much of it went to large industrial houses and the growth for them stood strong at over 20 per cent. It has however, steadily declined over the last 30 months.

The decline in demand and stress in the bank’s books on account of rising NPAs first showed up in terms of a decline in loan disbursements to medium and micro & small sized businesses.

While medium-sized businesses have been witnessing a contraction in loan outstanding every month since June 2015, micro and small businesses have seen a contraction since March 2016. However, the industrial sector continued to witness growth (though at a slow rate) until July 2016, on account of some growth for large businesses that account for more than 80 per cent of the total bank loan to the industrial sector.

The decline in gross bank credit growth is only a result of sharp decline in industrial credit growth (accounting for 40 per cent of bank credit), as all other components have been growing at a faster pace.

Pant added that while a rate cut may not fuel investment, a pick-up in demand on account of good monsoon, rise in rural demand and impact of implementation of the Seventh Pay Commission recommendations will raise capacity utilisation levels of companies, thereby incentivising them to invest. “The impact of rate cut on investments will come with a long lag,” said Pant.

Source: The Indian Express