Credit growth at 21-mnth low deposits continue to rise

At the peak of the interest rate rise cycle, the growth in bank advances fell to a 21-month low, according to data released by the Reserve Bank of India (RBI). High lending rates, coupled with the slowdown in fresh investments and an uncertain economic environment, were the major reasons that capped credit offtake.

As on December 16, bank advances grew 17.08 per cent annually. This is the lowest rate of growth since March 2010. Credit growth has been below the central bank’s projection of 18 per cent since the last two months.

“People have postponed investment decisions, owing to the growing uncertainty in growth prospects,” said Monish Shah, director, Deloitte. To clamp down on the high rate of inflation and inflationary expectations, RBI had raised policy rates by 375 basis points in thirteen tranches since March 2010. This took a toll on credit offtake, as banks reacted by increasing lending rates by around 250 basis points in the same period.

Recent data on industrial production showed growth fell 5.1 per cent in October. Concern over growth in economic activity has resulted in a slowdown in investment. “Companies don’t see a rise in demand for the next couple of quarters. This has impacted their capital expenditure plans,” said Arun Singh, senior economist, D&B India.

Bank credit is expected to pick up in the January-March period. “There could be higher credit offtake in the fourth quarter, provided interest rates stabilise,” said Shah. He expects RBI to keep policy rates unchanged during this period.

By end of March, credit growth is expected to be lower than RBI’s projection of 18 per cent. “I expect credit growth to fall to 16.5 per cent by March-end and 16 per cent by June-July,” said Singh. RBI had scaled down the year-end credit growth projection from 19 per cent to 18 per cent in the second quarter monetary policy review.

Earlier this month, the central bank had hinted at a reversal in the monetary tightening cycle in the mid-quarter policy review. “RBI may consider cutting policy rate after six-seven months, once inflation comes within tolerance levels,” said Singh.

Meanwhile, the rate of growth in bank deposits increased annually. As on December 16, bank deposits rose 18.03 per cent, compared to the same period last year. However, on a fortnightly basis, these fell by around Rs 38,000 crore, as companies withdrew funds to make advance tax payments. The deadline for making advance tax payments was December 15.