Monetary Policy: Flow Of Funds To The Economy Severely Constrained, Shows RBI Data

Flow of financial resources to the commercial sector, the widest measure of funding to the economy, saw a sharp fall in the first half of 2019-20 compared with a year ago, showed data released by the Reserve Bank of India on Friday. Funding from both bank and non-bank sources declined.

Flow of funds to the commercial sector fell to Rs 0.9 lakh crore between April and September 2019, about 87.6 percent lower than the flow of funds during the same period an year ago, according to the data released as part of the RBI’s mid-year Monetary Policy Report.

Adjusted non-food credit contracted Rs 1.28 lakh crore in April-September 2019, compared to an expansion of Rs 1.85 lakh crore in the same period last year. Adjusted non-food credit excludes bank investments in government bonds classified under as statutory liquidity ratio.

Fund flow from non-banks remained positive but fell sharply to 2.19 lakh crore in the first half of the financial year, compared to Rs 5.51 lakh crore a year ago.

The steep drop in the flow from banks also led to a contraction in the share of banks while the share of non-banks rose.

The flow of funds was bound to have dropped considering that we know that the economy is slowing, borrowing costs are rising and most NBFCs, apart from a handful of the larger ones, are unable to make disbursements, said Suvodeep Rakshit, senior economist at Kotak Institutional Equities. However, the data does provide an indication of the magnitude of these issues, he said.

To be sure, the quantum of fund flows can vary widely quarter to quarter. Credit disbursements, typically, pick up in the third and fourth quarters, he said.

While flow from banks constituted about a fourth of the total funds flow to the commercial sector in April-September last year, its share turned negative this year.

Banks held excess SLR of 6.9 percent of net demand and time liabilities on Aug. 30, 2019 as compared with 6.3 percent at the end of March this year, showed the report. Banks have augmented their SLR investments despite the reduction in SLR by the central bank, the RBI report said.

Within the flow from non-banks, among domestic sources, public issues of equity and private placement increased significantly. Life Insurance Corporation’s net investments in corporate debt, infrastructure and social sector also saw a steep hike.

Among foreign sources, both External Commercial Borrowings and Foreign Direct Investment registered sharp increases. Investments by LIC in corporate debt, infrastructure and social sector also rose significantly.