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Economy

Bank Credit Growth Slows and Crowding-Out Effect is Visible

Bank Credit growth as of October 5 has slumped to 15.9%, which is close to a near term low. Bank credit is all the credit that isn’t to the government, so it really means private lending (including to public sector enterprises).

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In the longer term, we can see how much credit growth has been in the recent past (2004-2008). With over 25% growth (and broad money supply was also growing at 20%+). We have gone down to levels that were common in the late 90s.

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However, it’s useful to see the Crowding-Out Effect. How much, in terms of a percentage of total assets, are banks using to buy government securities? That is, instead of lending to private industry or people, banks prefer to park money in government securities.

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Again, the peak was in mid-2009, just before elections, when everyone was running scared. This corresponds with lows in credit growth overall. Here’s a 20 year picture:

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What’s different now versus a few years ago is that SLR – the Statutory Liquidity Ratio, or the percentage of total assets that need to be invested in govt securities – is now just 23% (since August 2012) versus being at 25% for most of this period.

The peak in 2004 is something I don’t have a ready explanation for, and while we are nowhere close to those peaks, the fact that we’re seeing a crowding-out effect now is a significant macro factor. Don’t link this to stock markets; this indicator is lagged at least six months behind, it seems. Falling bank credit growth and a greater investment in government securities indicates hesitation to lend, and coupled with a hesitation to invest, it will guarantee a slowdown.

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