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The Great Recession and Developing Countries
domestic banks as overseas financing dried up. Exacerbating the problem was a sharp drop in flow of nonbank resources to the commercial sector. While funds from domestic sources declined by 31 percent, funds from foreign sources experienced a drop of 34 percent (table 6.3). Credit growth rate strongly decelerated in the wake of the crisis (figure 6.14). Nonfood credit (more than 97 percent of total credit) witnessed a dramatic slowdown from October 2008, despite banks lowering interest rates. Bank credit growth fell from a peak of 30 percent to about 17 percent in March 2009, due to a dim outlook for the economy and an uncertain funding environment. Sectors hit hard by the global meltdown—like small and medium enterprises (SMEs), textiles, and real estate—found it hard to access credit. Despite the RBI lowering policy rates and provisioning norms and reducing risk weights on exposures, lending rates have not fallen by a corresponding amount. The slowdown in domestic credit could potentially cut some 1.5 percentage points off expected growth in the Indian economy. The final negative impact of the shock was the outflow of foreign capital and sharply rising costs of external funding. Their higher costs Table 6.3. Flow of Nonbank Resources to the Commercial Sector (Rs billions) Domestic Resources
2007–08
2008–09
2,745.63
1,914.70
Public issues by nonfinancial entities
344.13
Gross private placements by nonfinancial entities
323.06
391.13
Net issuance of commercial papers
313.51
200.04
Net credit by housing finance companies
86.93
164.38
Gross accommodation by Indian financial institutions
–11.74
72.46
203.04
–30.12
Nonbanking Financial Companies Foreign sources
135.59
1,486.70
981.22
External commercial borrowings/foreign currency convertible bonds
630.08
275.88
American depository receipts/global depository receipts
249.72
46.87
Short-term credit from abroad
415.65
122.52
Foreign direct investment to India
191.25
535.95
4,233.23
2,895.92
Total nonbank credit
Source: Reserve Bank of India’s Macroeconomic and Monetary Developments, January 2009.