HYDERABAD: The ongoing NBFC crisis and the consequential credit squeeze may severely affect the economic growth, which is likely to be print at a six-year low of 5.5 per cent in FY20, said Fitch Ratings.
Given the sluggish pace of credit offtake, new lending as a percentage of gross domestic product (GDP) may dip to 6.6 per cent in FY20 from 9.5 per cent in FY19, it added.
"We expect economic growth (in India) to be 5.5 per cent in 2019-2020, before picking up to 6.2 per cent in 2020-2021 and 6.7 per cent in 2021-2022. Nevertheless, growth is likely to significantly below its potential over the next year or so," it said, adding that weakness has been fairly broad-based with both domestic spending and external demand losing momentum.India’s GDP already printed at a six-year of five per cent during the June quarter as against a robust eight per cent recorded the previous year.
Sectors such as auto and real estate have been particularly hit by NBFC credit squeeze and the Reserve Bank of India (RBI) data shows that the flow of new lending from NBFCs and housing finance companies crashed 60 per cent between April and September 2019. However, relatively better lending by banks mitigated the impact to an extent.
According to Fitch, the success of RBI’s inflation-targeting framework was associated with sharply rising real lending rates since mid-2018. While RBI lowered policy rates, they weren’t fully passed through because of which real borrowing costs have increased, weighing on credit demand.
The lack of monetary policy transmission derives from the combination of high public-sponsored deposit rates against a backdrop of stretched banks’ balance sheets. The competition from public schemes that offer attractive drates to customers, made banks reluctant to cut deposit rates and maintain elevated lending rates to derive better margins.
On its part, the government announced a slew of measures to revive credit and economic growth in general.Among them easing NBFCs’ liquidity position by encouraging banks to purchase high-quality NBFC assets through credit guarantees and additional liquidity besides providing upfront capital infusion into banks and reduction of corporate tax rate are likely to aid growth.
Auto, realty sectors down
Auto and real estate sectors have been hit by this. RBI data shows that the flow of new lending from non-bank sources was down 60 per cent y-o-y in April-September period
GDP expanded by a meagre 5 per cent year-on-year, down from 8 per cent a year earlier. This is the lowest growth since 2013. Weakness has been fairly broad-based