By?Shubhra Agrawal
According to recently released data by the RBI, bank credit demand climbed up to 5.52 per cent ? this is being hailed as a positive start to the fiscal year 2018.?
Rise in credit and economic growth
A growing credit demand increases liquidity in the market ? consumers as well businesses can borrow and spend more. The expansion of credit tends to cause the price of assets such as stocks and property to increase. Rising asset prices give the owners of assets more collateral against which they can borrow further. This cycle of expanding credit leading to increased spending, investment, job creation and wealth, followed by still more borrowing produces a happy upward spiral of prosperity. Eventually, every credit-induced economic boom comes to an end when one or more important sector of the economy becomes incapable of repaying the interest on its debt.?
A?new low in 2017 ? Bad debts
The bank credit demand had slumped to a six-decade low in the fiscal year 2017. This low growth in credit demand is attributed to high bad debt and almost negligible corporate demand. Bad debts can occur in either of the two situations ? either the borrower is not able to pay or the cost of collecting the debt is more than the worth of the debt itself. In both the cases, bad debt ultimately means money lost for the creditor. Hence, a high bad debt situation reduces the confidence associated with the market. It leads to lower investment and thereby reduction in the availability of capital. During this period, it was observed that the companies were taking in funds from the corporate bond market.
Brighter prospects for the future?
A?high growth rate in bank credit has put the bad debt crisis in the background. It has been claimed that the Indian economy would remain one of the fastest growing economies, despite major road block events like demonetization and Brexit. This is also supported by the recent accomplishment of Sensex, the benchmark equity index closing at 30,133.35 points ? its highest level ever. The index has risen by 1.3% during April 24-27.?
The rise in credit demand though is simply a bubble. Most of the banking crises in the past have been preceded by rapid credit growth, including the recent global financial crisis of 2007-09. The bubble will burst only to leave a situation of no jobs and a slumped economy behind.
Private investment is not at its peak and the industrial sector is still struggling to function at its optimum efficiency. Although forecasts for the GDP are positive, the improvement is simply due to a change in the method of calculation and does not reflect growth in the real sense. Many infrastructure projects across the country are progressing at a snail?s pace ? a threat to the economic growth. India seems to be witnessing a phenomenon of jobless growth. Lourdes Casanova, a senior lecturer at Cornell University?s S C Johnson School of Management, has said, ?For a country where poverty is so pervasive, growth without job creation is not real growth.? If the credit growth had risen due to improvement in the economic conditions, it would have certainly accompanied by an increase in the number of jobs. In absence of overall growth, the bank credit growth might as well be an indication of the incoming bank crisis.
In his first speech after taking office, RBI Deputy governor Viral Acharya said that India needs to urgently address the large amounts of bad debt held by its lenders. Just like water rushing back is an indication of an upcoming tsunami, the rise in bank credit demand might be a sign of an upcoming economic disaster, and the government must take all possible steps to avert this disaster.
Featured Image Credits:?Pixabay
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