Trends in Bank Credit 2016: Credit Impulse and the Twin Balance Sheet Syndrome

Economic Survey 2015-16 notes that during the 2015-16, the year-on-year credit growth is remaining around 10%. This figure is down from last few years when the normal was around 20%. The sluggishness in growth is attributed to several reasons such as incomplete transmission of the monitory policy, unwillingness of banks to lend credit on account of rising NPAs, and more attractive interest rates for borrowers in the bond markets.

Credit Impulse

The concept of Credit Impulse was given by Michael Biggs, in November 2008. This concept implies that the main function of the banking system is to work as a chief intermediary for the flow of funds from households (who deposit their savings) to the corporate sectors (who are net borrowers). Whenever there is a downturn, the credit growth declines due to a slowdown in demand by corporate.  Due to this, there is a close link between bank credit and investment’ and this growth in bank credit can be used to predict the investment trends in the economy. Credit impulse measures the change in the flow of bank credit relative to economic activity. It measures the stimulation that growth in the flow of bank credit gives to investment spending.

The economic survey notes that the since March 2015, the Credit impulse in the country has shown a consistent rise and thus, it may push the growth of real investment in near future.

The NPAs and Twin Balance Sheet Syndrome

The survey notes that one of the most critical short-term challenges before Indian economy is the twin balance sheet problem of banks and corporates. The public sector banks are burdened with the high non-performing assets (NPAs) while some of the corporate houses are also under stress due to sluggish global demand. This has been called the “TBS problem” or “Twin Balance Sheet Syndrome“.

We note here that the government is planning to infuse Rs. 70,000 crore in next few years in the PSUs but actually banks need Rs. 1.8 Lakh crore by FY 2019.

To handle the TBS syndrome, the Economic Survey has recommended four Rs viz. Recognition, Recapitalization, Resolution and Reform.

• Recognition: The banks must value their assets as far as possible close to true value (recognition) as the RBI has been emphasizing.
• Recapitalization: Once recognition has been done, the banks’ capital position must be safeguarded via infusions of equity as the banks have been demanding.
• Resolution: The underlying stressed assets in the corporate sector must be sold or rehabilitated as the government has desired.
• Reform: Future incentives for the Private Sector and corporates must be set-right to avoid a repetition of the problem.

We note here that the NPA problem is not going to be resolved in near future. Last decade was reported to be the worst quarter and currently, over 5% of the total loans given by banks have turned NPAs. The overall stressed assets (including declared and potential bad loans) are at about 11 per cent.