The loan growth of India that had peaked at 40% in early 2006 is experiencing a downward trend. One of the reasons for this situation is that Reserve Bank of India (RBI), the apex bank of the country has been hiking the interest rate since 2006 to check inflation. Higher interest rates have increased defaulters who are tagged as low income earners belonging to blue collar jobs and self-employed traders. Notwithstanding, the banks to overcome the delinquency crisis have tightened lending procedures which has drastically brought down the loan growth to the current level of 20%.
Although most of the countries had to encounter problems related to the US mortgage crisis, India so far was spared due its lower exposure to the US markets. Smaller size of the banks and conservative overseas investment focus were also other reasons for Indian financial system to avoid the after effects of the sub-prime crisis. But the Indian banks are experiencing a similar kind of crisis, which has put the US economy into recession. Non performing loans of all the banks are getting higher day by day and they are not without the fear of global economic slow down.
Ever dwindling borrowers’ numbers coupled with tightened lending norms by the banks have taken the sheen out of the Indian economy which was projected to grow at the rate of 10%. Latest projections for the year of 7% growth and inflation beyond 5% are putting the banks as well as the economy under tremendous pressure. ICICI, India’s largest private bank’s departure from personal loans below $2500 six months ago strongly vouch for the current situation. However, top banks in the country stated that they are still backed by strong performance, and only as a precautionary measure they have tightened norms on lending.