How to revive bank credit: Government should, to begin with, offer PSBs bonds in return for equivalent equity

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Abstract: 

There is general agreement that tepid growth in bank credit has been a major obstacle to launching the economy into a 8% plus growth trajectory. Bringing credit growth back on track in turn requires restoration of the health of Public Sector Banks (PSBs).

Before I turn to the issue of how we might restore the health of PSBs, let us get the facts on the slowdown in credit growth right.  Today, it is universally believed that the annual growth of credit advanced by the Scheduled Commercial Banks (SCBs) in 2016-17 fell to 5.1%, the lowest in six decades. This is the figure in a widely quoted April 2017 PTI story.

The latest data in the Reserve Bank of India (RBI) Handbook on Statistics show, however, that SCB credit has actually grown 9% in 2016-17.  This is far from the lowest in the past six decades.  For example, at 5.7%, credit growth in 1993-94 was more than 3 percentage points lower.

It deserves noting that the 9% figure represents continuity rather than a sharp break from the recent trend.  For the corresponding figures for 2014-15 and 2015-16 were 9.3% and 10.9%, respectively. Recalling that the economy grew 7.5% in 2014-15 and 8% in 2015-16, predictions of impending economic collapse based on a collapse of credit growth must be taken with a pinch of salt.