Bank deposits outpace credit growth

Deposit accretion in banks continues to outpace loan disbursements this financial year. The trend prompted lending rate and deposit rate cuts by several banks in the period.

As the Reserve Bank of India (RBI) data released on Thursday, bank deposits grew Rs 91,853 crore between June 29 and September 7, 2012. Outstanding credit fell by Rs 11,153 crore in the same period. In the first five months of the current financial year, deposits were up by Rs 2 lakh crore, while credit was up Rs 44, 904 crore.

“Credit growth did not pick up as there was not much demand while people opted to park their savings in bank deposits rather than going for risky investments in an uncertain market,” said a senior official of a public sector bank. This led to a surge in deposits while disbursements lagged, the official added.

Several banks including State Bank of India, ICICI Bank and HDFC Bank lowered deposit rates in order to protect margin erosion. Also, lending rates and processing charges were cut to boost credit demand.

"With new investments in big ticket projects on hold, we are focussing on retail segment to boost credit growth in the festive season," said an executive director of a large public sector bank. Typically, credit offtake picks up in the third and fourth quarter of a financial year fuelled by festive demand in India.

The RBI has projected annual deposit growth of 16 per cent and annual credit growth of 17 per cent by the end of current financial year. As on September 7, deposits grew by 14.36 per cent and credit grew by 16.55 per cent as compared to same period last financial year.

Citing need for liquidity in the festive period, the central bank lowered cash reserve ratio requirement by 25bps in the mid-quarter monetary policy review. Presently, the cash reserve ratio or the portion of funds that banks need to keep with RBI is at 4.75 per cent which will reduce to 4.5 per cent from the fortnight beginning September 22, 2012.

The RBI said that festival-related demand and advance tax outflows could accentuate pressures on liquidity in coming weeks. Also, the monetary policy action was to support the recent fiscal policy decisions taken by the government. "Typically, during the festive season, liquidity tends to tighten up a bit," said RBI Deputy Governor Subir Gokarn a day after the announcement of mid-quarter monetary policy. He added that the central bank did not want liquidity to become a constraint to the extent what impact the recent fiscal policy actions would have on economic activity.