Credit revival needs fiscal stimulus-led spending: Motilal Oswal

New Delhi: The revival in credit growth in the country is easier said than done and a revival of credit demand in the absence of a large spending-led fiscal stimulus is implausible, broking house Motilal Oswal said on Tuesday.

"A revival of credit demand in the absence of a large spending-led fiscal stimulus is implausible. Unless public sector borrowing requirements (PSBR), and not the central government's fiscal deficit, widens further from 9 per cent of GDP in 2018-19, it is highly unlikely that regulators will be able to push credit demand," a Motilal Oswal report said.

"As we have argued earlier, we don't believe there is a need or the space for fiscal stimulus in India. Based on our estimates, credit growth to the non-government non-financial (NGNF) sector has weakened to record-low of 6.4 per cent YoY (year-on-year) in Q2 2019-2020," it said.

"At the same time, incremental credit has declined 90 per cent YoY in 1H (first half) of FY20.In order to adopt the right policies to address this slowdown, it is imperative to identify the factors behind this. Our analysis suggests that the deceleration in credit growth during the past 12-15 months is led by a combination of stable-to-marginally better demand and weaker supply, led by tight credit standards amid abundant liquidity.

"However, if the impact of demonetisation is considered (which has affected growth numbers in the last 3 years), it can be concluded that while credit demand has weakened further, credit supply has improved," it added.

According to the report, during 2017-18 and mid-2018-19, credit growth picked up but interest rates declined further. The combination suggests the dominant role of abundant supply created by demonetisation.

During the past 4 quarters, however, credit growth has weakened sharply with slightly higher interest rates, which means supply-side factors have dominated the past 12-15 months.

"There was a lack of supply led by tight credit standards amid abundant liquidity. While it is difficult to comment on the credit demand during the past three years, the so-called lack of credit supply is a recent phenomenon, most likely triggered by the NBFCs crisis in late-2018," the report said.

Weak credit demand during the past many years and the recent trend of tight credit standards are a reflection of weak economic fundamentals and bleak expectations. Due to this, borrowers are not confident of the future economic growth and lenders are unsure about their repaying ability, it said.

"Moreover, lenders may also be afraid of possible skeletons in the borrowers' books," it added.

Oh the supply-side factors, the brokerage said that since there is no shortage of liquidity in the system, measures such as lower cash reserve ratio (CRR) or lower (RBI)reverse repo rate, by widening the rate corridor will most likely be fruitless.

"Similar experiments in the West during the past decade has taught us that even negative interest rate on excess reserves may be totally incapable of reducing risk-averseness among lenders," it said.

"Lower reverse repo rate, however, will reduce the RBI's interest payments to the financial sector, and thus, improve fiscal non-tax receipts in the form of better RBI dividends," it added.

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