Banks' risk aversion slowing down credit growth, says RBI

Acknowledging that the credit growth has moderated in a couple of months, Reserve Bank Deputy Governor Rakesh Mohan today attributed the trend to risk aversion of the private and foreign banks.

The credit growth has slowed down in couple of months, but that of public sector banks was about 28 per cent year-on-year. Overall it was around 22 per cent, Mohan said at a seminar here.

“What has happened very interestingly in terms of risk aversion. It’s private sector and foreign banks whose credit growth is very very low,” he said. Noting that all Indian banks have capital adequacy far in excess of regulatory requirement, he said it is a fact so far that banks remain profitable without exception.

Growth in advances by the public sector banks are high as these entities are subject to government’s exhortation. Besides, the effect of monetary policy is higher on these entities, he said. “So the credit growth so far has been relatively healthy but it is correct to say you have to watch how much risk aversion would be observed and how much it (risk aversion) is rational,” he said.

“What is it we should be doing from policy point of view to preserve the financial systems’ health while helping the real economy not to go down,” he added.
 

IN THE DOWNTURN Bank group-wise credit growth
Growth in %	As on Jan 4 2008	As on Jan 2 2009
Public sector banks	19.8	28.6
Foreign banks	30.7	16.9
Private sector banks	24.2	11.8
Scheduled commercial banks*	21.4	24
* Includes regional rural banks (RRBs) Source: RBI

Mohan said even in the backdrop of the Lehman crisis money markets in the country are behaving normally in terms of volume.

During September and October (2008), the daily market volume were not different from any other month when global markets were undergoing worst volatile phase, he said.

Speaking about the impact of global financial crisis on the Indian economy, the RBI Deputy Governor said “on the one hand we have the cushion of the agricultural economy and also the rural non-farm economy.”

The rural economy by and large remains unaffected by the global economic downturn.

Third, Mohan said, the cushion available is the financial system and the central bank’s operations themselves and fourth is the fiscal stimulus for private expenditure.

According to the Central Statistical Organisation estimates India’s economy is expected to expand by 7.1 per cent in 2008-09 despite global slowdown.

Farm sector output is projected to grow by 2.6 per cent in FY09, slower than last year’s 4.9 per cent, manufacturing by 4.1 per cent, down from 8.2 per cent, construction by 6.5 per cent against last year’s 10.1 per cent and financing, insurance, real estate, business services by 8.6 per cent against 11.7 per cent.

The estimates match the one projected by the Prime Minister’s Economic Advisory Council and are a tad higher than what the Reserve Bank has estimated.