Credit growth likely to decelerate further

RBI's macroeconomic and monetary development report

Higher lending rates and tight liquidity conditions would continue to hit the demand for loans, resulting in a further slowing of growth in bank credit, the Reserve Bank of India (RBI) said in its macro-economic and monetary development report on Monday.

In the first quarter of this financial year, bank advances rose 20 per cent, compared with 22 per cent in the year-ago period, mainly on account of a rise in lending rates and a high base effect.

RBI said a slowdown in credit was evident, primarily for public sector banks. Foreign banks, that had cut lending during the crisis significantly increased it. In the quarter ended June, credit flow from foreign banks rose 17 per cent, compared with 12 per cent in the same period a year ago.

Sectoral deployment data showed bank credit to the agricultural activities and services sector shrank 1.4 per cent and 0.9 per cent, respectively, while credit flow to industry and personal loans rose 2.9 per cent and 1.4 per cent.

A steady rise in policy rates since March 2010 led to a rise in lending rates, as well as deposit rates. As a result, the gap between credit growth and deposit growth narrowed from nine percentage points in mid-December to 5.6 percentage points in March and to 1.5 percentage points in July.

RBI said time deposits rose sharply, while demand deposits saw a decline following the increase in deposit rates. Broad money growth increased faster in the quarter ended June, even when reserve money growth decelerated.

Liquidity conditions turned to a deficit mode in April and remained so through the entire quarter. RBI said though usually there is liquidity surplus in April, this year it was the opposite, with banks borrowing Rs 19,000 crore daily, on an average. Government borrowing through cash management bills and additional borrowing through treasury bills, the average daily net liquidity injection under the repo window, increased to around Rs 55,000 crore in May and Rs 74,000 crore in June.

The RBI said overall monetary conditions remained in line with the policy stance in the quarter. Going ahead, liquidity conditions are expected to remain in a deficit mode for better transmission of monetary policy.