Credit flow rises on year-end rush

With lenders pushing for loans to meet their annual targets, bank credit flows increased by Rs 37,465 crore during the second half of February -- the highest fortnightly disbursal seen this quarter.

With lenders like State Bank of India sitting with Rs 40,000 crore surplus cash, bankers expect the rush to continue in March even if it means lending at lower rates.

According to the latest data released by the Reserve Bank of India (RBI) today, during the 12 months ended February 26, bank credit grew by 13.81 per cent. The outstanding bank credit was estimated at Rs 30,89,323 crore during the fortnight-ended February 26, 2010 as against Rs 30,51,676 crore at the end of February 12, 2010.

Despite the credit pick-up seen in recent weeks, growth is still lower than RBI’s projection of 16 per cent. To meet the estimate, banks will need to lend around Rs 1,20,000 crore this month.

Short-term loans drive demand
Senior bank executives said the pace of growth was still subdued and most of the demand was for working capital requirements across the segment.

“We see demand from the corporate sector, especially in the public sector, increasing for short term loans. We are yet to see full-fledged demand in the system. Generally, demand for credit picks up at the end of the quarter,” said P Narendra Executive Director Bank of India.

“Most of the fund is being picked up by public sector undertakings, including oil companies. The growth in SME, retail segment is not happening in the way we would like it to be,” said G S Vedi, chairman and managing director of Punjab and Sind Bank.”On a year-on-year basis, the overall credit growth could be 14-15 per cent by the end of March.”

“Disbursements are taking place this month. We expect the overall credit growth to be in the range of 15-20 per cent,” added Parthasarathi Mukherjee, Head Credit at Axis Bank, the country’s third largest private sector lender.

Rajesh Dubey, head of SME rating at ICRA said there was an improvement in the economic climate. The SME segment has shown an increase in the use of credit limits but that is mostly for running existing business, Dubey said. “Any improvement in the demand for credit to fund for capacity expansion is still a few months away.”

Bankers said the surge in short-term loans was partly triggered by the shift to the base rate mechanism and on lending below the benchmark rate from July. “Short-term loans at lower rates will disappear after the base rate is applicable. Corporates are availing more short-term loans before that,” said a senior executive of a public sector bank.

But bankers said cost of funds was not a concern at the moment. With cost of funds rising marginally, following the increase in the cash reserve ratio, banks are now charging more than what they charged at the start of the quarter. Compared to three months ago, when banks were charging 6-7 per cent for short-term working capital finance, the rates had hardened by at least 50 basis points, a banker said.

On a year-on-year basis deposits grew by 14.62 per cent during the fortnight-ended February 26. Like bank credit, deposit growth was also below RBI’s projection of 18 per cent for 2009-10. During the fortnight, deposits grew by Rs 63,487 crore, with time deposits going up by Rs 39,719 crore and demand deposit with a tenure of less than one year rising by Rs 23,747 crore.

As a result of credit off take, bank investment in government securities and other approved securities dropped by Rs 14,896 crore during the fortnight ended February 26, 2010.