Bank deposits growth at 14-yr high

FIRST QUARTER REVIEW OF ANNUAL MONETARY POLICY 2007-08

The banking sector is on a roll and has achieved a record deposit growth till now in the current financial year. Banks have mobilised deposits to the tune of Rs 1,05,727 crore (April-July 6), which is a 14-year high. Banks have aggressively mobilised time deposits (including certificates of deposit) with an aggregate deposit growth of Rs 1,02,866 crore in the first quarter of FY08, outstripping the 11-year high recorded in FY07 at Rs 75,626 crore.

The Reserve Bank of India (RBI) and Finance Minister P Chidambaram in their interactions with bank chairmen have been insisting that banks take active steps to boost deposit growth to fund the productive sector. The RBI in recent past had also expressed concern over banks raising funds through certificates of deposits.

"The increase in deposit rates have contributed to the overall growth in banks' deposits base. The increase in time deposits can be attributed to increased economic activity, increase in interest rates on bank deposits, unchanged interest rates on postal deposits and extension of tax benefits under Section 80C on bank deposits,'' said senior bankers.

On a year-on-year basis, banks have seen a 24.4 per cent increase in aggregate deposits at Rs 5,31,881 crore up to July 6, 2007, higher than 20.9 per cent at Rs 3,77,392 crore recorded in the year ago period. The outflow of long-term deposits during the preceding two years has been arrested and there were fresh accretions to long-term deposits in the April-June period, which augurs well for banks' asset-liability management.

This increase in long-term deposits has helped banks fund the infrastructure sector, which are longer tenure loans. The rise in interest rates shifts in banks' portfolios in favour of investments in gilts and prudential considerations have also seen banks rebalancing their credit portfolio. There has been some deceleration in bank lending to sectors such as real estate, housing, computer software, trade and transport operators. On the other hand, there are indications of a pick-up in credit demand from agriculture and industry, in particular, infrastructure. During 2006-07, bank credit to agriculture recorded the highest growth (32.4 per cent), followed by the services sector (31.0 per cent), personal loans (26.5 per cent) and industry (25.7 per cent).

Within the industrial sector, sizeable credit offtake was recorded in infrastructure (26.8 per cent), textiles (34.2 per cent), basic metals and metal products (26.7 per cent), petroleum (41.0 per cent), food processing (27.9 per cent), engineering (24.5 per cent), chemicals (14.2 per cent) and construction (46.7 per cent).