An official shows new currency notes of Rs 500 at State Bank of India head office in New Delhi (Source: PTI)

RBI Counters Government Claim That The Economy Is Starved Of Credit

The Reserve Bank of India on Tuesday reiterated that credit growth to the economy remains strong, countering the narrative that lending restrictions placed on weak banks are leading to constrained flow of credit.

Adjusted non-food bank credit grew at a strong 15.6 percent during the fortnight ended Nov. 9, showed data put out by the RBI. Adjusted non-food credit shows the flow of resources to the commercial sector and adjusts for government bond investments made by banks.

The data attempts to counter the claim that restrictions on weak banks and stress in the NBFC sector is hurting flow of credit to the economy.

While acknowledging that bank credit growth has picked up, Sanjeev Sanyal, principal economic adviser to the government has argued that SME and real estate firms are not seeing adequate credit flow.

A break up of credit flow to individual industries will be released at the end of the month.

“We are concerned that many of the NBFC (non-banking finance companies) will see much slower credit growth than in recent past. Also, SMEs (small and medium enterprises) continue to suffer from a credit crunch. We do need some part of the banking system to expand,” Sanyal told BloombergQuint in a interview on Monday.

The government is asking the RBI to ease restrictions on weak public sector banks to enable them to begin lending again. The RBI, however, argues that the balance sheets of these banks need to be strengthened further before they are allowed to start lending.

“It’s important that the PCA framework to deal with financially weak banks is persisted with. Any slackening of the approach in the midst of required course of action is an all-too-familiar and ultimately harmful habit that we must eschew,” Acharya had said in a speech on October 12.