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Tight Credit Curbs Growth in India
NEW DELHI — Customers come in a tiny trickle to the showroom of Uppal Motors, a Honda motorcycle dealership near here in an upscale satellite of India's capital.
This time of year, the showroom is usually packed, for it is the week before the Hindu festival of Diwali, when many Indians buy gifts and more costly items. But not this year.
The call center workers and software programmers who normally shop here could afford a new motorcycle — if only the banks would lend to them, said Virender Uppal, the dealership's owner, who added that sales were down 10 percent.
"They cannot meet the terms and conditions of the bankers," he said. "Money is not being extended to them."
Like so many countries, India is experiencing a credit crisis. The country, like many emerging markets, had little exposure to subprime home lending or to Western financial institutions. Still, the government is pulling out all its tools to combat the global financial turmoil, whose effects have been compounded by earlier decisions to tighten the money supply. And local businesses are grappling with a rapidly slowing economy.
The Indian economy expanded at a rate of more than 8 percent for the last three years, making India the fastest-growing country in the world after China. But growth is expected to slow this year, perhaps significantly.
Five finance companies once had sales representatives right inside Mr. Uppal's dealership, ready to help customers arrange instant credit.
But three of them — including the Indian arms of Citigroup and GE Capital — recently closed their counters.
Those still offering credit have imposed new qualifications: they want buyers to own a residence; have at least one year in their current jobs; and keep plenty of money in the bank. And they now require down payments of as much as 40 percent, up from 20 percent.
India's financial sector breathed a sigh of relief last week after the country's central bank took a series of steps to ease the financial crisis, which had pushed overnight lending rates among banks to more than 20 percent. The overnight rate has since fallen to 7 percent. But the trouble may be just beginning.
Foreign institutions, many desperate for cash to cover margin calls and redemptions at home, have been pulling money out of India. Since January, foreign investors have taken $11 billion out of the Indian market, which has lost nearly 50 percent of its value in that time. This wave of selling accelerated during the last month as stock markets in the United States and Europe plunged.
The withdrawals, combined with fears that slowing Western economies will crimp Indian growth, have led to some of the biggest one-day declines in India's benchmark Sensex index since the country's financial crisis in 1990.
The rapid exit of foreign capital has also set off a precipitous decline in the rupee, which slid to its lowest level ever against the dollar, breaching the 50-rupee barrier Friday.
The Reserve Bank of India, the country's central bank, revealed that it has spent at least $8 billion to buy rupees in the market to soften the currency's fall. Analysts said they suspected that the bank had an informal goal of trying to keep the rupee from trading at more than 50 to the dollar.
So far, India's foreign currency reserves have been adequate to weather this storm. The country's total reserve assets declined about 7 percent from August, to $274 billion in the second week of October, according to the most recent figures available. While that pales in comparison with the $1.9 trillion amassed by China, the other emerging giant in Asia, economists said it was more than adequate to cover India's obligations.
"India, from a macro point of view, is not that exposed to foreign debt," Seema Desai, an analyst with the Eurasia Group in London, said.
Ms. Desai said that India's reserves were greater than those of Brazil and far exceeded those of some emerging economies in Eastern Europe, which were in deep trouble because of the crisis.
Still, bond rating agencies downgraded India's sovereign debt this summer to near junk status as the country faced a yawning fiscal deficit and spiraling inflation. India's bonds traded lower at the start of October, but have recovered in recent days.
The central bank now must walk a fine line between defending the rupee and making sure there is enough cash in a system already suffering from a severe credit crisis.
This year, the central bank tightened the money supply, raising interest rates and reserve requirements for banks, in an attempt to curb inflation. Then came the rapid exodus of foreign capital and the bank's rupee purchases, which further constrained money available for lending.
"Liquidity had disappeared," Chanda Kochhar, joint managing director of Icici Bank, India's largest private lender, said. "It was not as if that brought the system to a standstill. But one should not have a system where this would continue."
In the last two weeks, the central bank has pumped an estimated $21 billion into the banking system. The central bank also offered some $4.1 billion to the country's mutual fund industry through a special auction, while regulators gave mutual funds greater leeway to borrow.
To stem a possible panic at Icici, the Indian bank most affected by the worldwide crisis, the central bank took the unusual step of announcing that it had examined the bank's balance sheet and had found it well capitalized, and that it stood ready to provide additional funds as a backstop if necessary. The immediate threat to India's banking system seems to have passed.
Now, the country is bracing for a worldwide economic slowdown. India has the cushion of a huge domestic market, 1.2 billion people strong, but its once white-hot growth was cooling even before the crisis.
India's airlines are already suffering. Several carriers have defaulted on their fuel bills, and the largest airlines are struggling to shed workers in a country where laws and labor unrest make layoffs difficult.
India's export sector is also anxious. Infosys and Satyam, two prominent outsourcing firms, have told investors that they expect weaker earnings as American and European companies pull back. Meanwhile, imports will be hurt by the rupee's fall, which makes the cost of goods from overseas more expensive.
The biggest effect may be on India's infrastructure projects. The government had been planning to pour billions into new roads, ports, airports and power plants — much of it with foreign financing.
"How much can be achieved," Roopa Kudva, chief executive of Crisil, an Indian ratings agency, said, "because of government budget pressure and the drying up of foreign funding?"
