India's credit squeeze pushes growth to six-year low, says Fitch Ratings

The Indian economy is being held back by a large squeeze in credit availability emanating from non-bank financial companies (NBFCs), according to the latest research report from Fitch Ratings.

Fitch’s latest Chart of the Month shows that, assuming the sluggish pace of lending is maintained throughout the year, total new lending will amount to only 6.6 percent of GDP in the fiscal year 2019-2020, down from 9.5 percent in the previous fiscal year.

The Indian economy decelerated for the fifth consecutive quarter in 2Q19, with GDP expanding by a meagre 5 percent y/y, down from 8 percent recorded a year earlier. This is the lowest growth outturn since 2013. Weakness has been fairly broad-based, with both domestic spending and external demand losing momentum, the report added.

While an array of factors have contributed to the Indian slowdown - including a downturn in world trade - Fitch believes that the severe credit squeeze has taken a heavy toll. NBFCs have faced a severe tightening of funding conditions over the past year and a half.

They have in turn sharply reduced the supply of credit to the commercial sector. The auto and real estate sectors have been particularly hit by NBFC credit rationing. Data from the Reserve Bank of India (RBI) showed that the flow of new lending from non-bank sources was down 60 percent year on year between April and September.

In contrast, banks' lending has held up well in recent months, mitigating some of the overall credit supply shortfall. However, bank lending could not prevent a sizeable credit crunch in the first half of 2019, Fitch Ratings further noted in the report.