NEW DELHI: Call it a slowdown in demand or a fall out of the NBFC crisis, but the Centre’s efforts to pump liquidity into the market seem to be having little impact. Data from the RBI shows that overall financial flows to the commercial sector in the current fiscal year (FY2019-20) have contracted by a staggering 88% as of mid-September, going from Rs 7.36 lakh crore a year ago to just Rs 91,000 crore.
According to the assessment of the RBI’s Monetary Policy Committee, there has been a virtual crash in commercial credit flows. Interestingly, non-food credit by banks, which was Rs 1.65 lakh crore last fiscal, has contracted to Rs 93,700 crore.
Banks do business by lending money deposited by customers to businesses and consumers, which is a pivotal factor in ensuring the circulation of money and economic growth. However, the contraction in non-food bank credit indicates that while banks are getting deposits, lending and borrowing activity has fallen. In fact, fund flows from non-banks have also fallen sharply, almost halving from Rs 5.51 lakh crore in the same period last year to Rs 2.19 lakh crore this fiscal.
On the positive side, there has been an improvement in funds raised from public issues and private placements, and FDI and ECB inflows. FDI flows to the commercial sector went up from Rs 1.06 lakh crore to Rs 1.52 lakh crore, mainly on account of the relaxation in the policy norms for FDI and ECBs over the past few months.
This sharp fall in overall fund flows explains, to some extent, the dramatic slowdown in the economy and why the finance ministry has launched the loan mela programme.
“Generally, such a situation happens when there is a steep contraction in demand and caution among investors… Here, the picture we are getting is a combination of both, which is not a pretty scene. So, the RBI’s rate cut will not help the market if consumption does not improve. If you see the market, there was no spark despite the rate cut and that was mainly because of these bleak numbers,” a senior analyst with Edelweiss told this newspaper.
Bankers point to this as the primary reason why the finance minister announced loan melas in about 400 districts as part of the stimulus package, in order to push lending for individuals, MSMEs, agriculture and small businesses.