When it comes to borrowing money, be it individuals or companies we all expect interest rates to come down. But we quickly change our expectations when we are depositors. So, needless to say interest rates affect a lot of our decisions.

During the festival of lights – Diwali, often many splurge even on credit buying expensive things. But this year non-food credit growth was unusually low. You see, this time of the year usually sees credit growth of banks pick-up which often reaches its peak in the last quarter of the financial year. But this year, the data for September 2014 was not encouraging. The data for non-food credit slipped to 8.6% from 10.2% reported in the month prior. You see last year in September 2013, non-food credit had grown to a roaring 18.2%. While personal loans grew at 13.0% in September this year (from 12.8% in the month prior), the data in this segment too was far lower than 17.9% clocked last year in September.

So what is the reason for it to be different this year?
Well, the elevated interest rates regime has effected a slower credit growth. This is because when the interest rates are high, individuals often refrain from opting for a loan. Thus with the demand for credit from consumers (as well as industry) being low, it translates into lower economic growth rate.

Going by the recent numbers, it seems high economic growth may not kick-in soon with ease although sentiments in the economy may have revived. Despite the busy festive season, credit growth has failed to revive. PersonalFN is of the view that lacklustre bank credit from industry that too from the segments with strong financials, shows that capex cycle may take some more time to revive. Companies might want to see revival of demand before they can think about further expansion.

But as and when the RBI reduces policy rates, it is expected that credit growth may witness buoyancy. At present with favourable macroeconomic variables such as mellowing inflation, falling crude oil prices, improved Current Account Deficit (CAD) and improvement in India’s economic outlook; there are factors that may encourage the Reserve Bank of India (RBI) to reduce policy rates. But in all possibility the central bank may look beyond inflation, falling crude oil prices amongst host of others and take cognisance of non-food credit growth which remains the important factor while enunciating the monetary policy stance.

While opting for loans, PersonalFN is of the view that one should stretch knowing his means and focus on his / her long-term financial wellbeing, which may be at jeopardy with too many loans to service. It is vital to be a adopt prudence while managing finances and invest in asset classes appropriately in the endeavour to achieve financial goals in life.

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