Chart of the Day | Funding to the economy has collapsed

We have highlighted earlier (here and here) why the government is using every possible opportunity to push banks to lend – tepid loan growth and in some cases, an outright shrinking in credit. This chart taken from the Reserve Bank of India’s bi-annual Monetary Policy Report shows the problem in stark detail. It shows that the commercial sector is starved for funds.

Overall, financial flows to the commercial sector in 2019-20 (up to mid-September) has declined to around Rs 91,000 crore compared to Rs 7.36 lakh crore a year ago, a sharp decline of 88 percent. We already know about the contraction in bank credit. The liquidity problems in the non-bank sector have shrunk funds flows from that sector as well. As we have noted earlier, the twin reasons for this decline in debt flows to the commercial sector are risk aversion among lenders owing to multiple defaults and downgrades, and lack of demand.

The situation would have been worse if not for an increase in funds raised from public issues and private placements. An improvement in foreign direct investment (FDI) and external commercial borrowing inflows (after norms were relaxed early this year) are also notable.