Credit growth set to moderate

The Reserve Bank of India (RBI) on Monday said credit expansion of Indian banks would further moderate as growth and inflation ease. The annual rise in bank advances, though slow, was higher than the central bank's projection of 18 per cent in the second quarter of the current financial year.

Banks recorded credit growth of 21.4 per cent as on September 30.

RBI said though the credit growth was lower than last year's, due to the high base effect, it was above the expected trajectory, primarily because of high nominal gross domestic product growth. “Credit growth has remained strong, the successive interest rate hikes notwithstanding,” RBI said, a day ahead of the half yearly review of monetary and credit policy 2011-12.

As a result, the share of non-bank sources in meeting the credit demand rose to 54 per cent in the April-September period from 46 per cent in the corresponding period a year ago. Funding from commercial papers rose 43 per cent, while that from non-banking financial companies increased 13 per cent. Foreign funding increased 37 per cent in the April-September period, compared to the corresponding period of the previous year.

Within the banking sphere, while public sector banks were the biggest providers of credit, foreign banks registered the highest credit growth at 26 per cent, compared to the corresponding quarter last year. RBI said liquidity remained in line with the policy objective throughout the quarter, and that no significant infusion was made to increase system liquidity through bond buyback and foreign exchange. The average injection through the liquidity adjustment facility stood at around Rs 47,000 crore in the quarter ended September, lower than Rs 49,000 crore in the previous quarter.

Meanwhile, the central government’s cash balance turned negative from July, reflecting the increasing dependence on ways-and-means advances and RBI's overdraft facilities. The healthy pace of 19 per cent growth in deposits led banks to invest more in government securities, in the absence of credit offtake. Banks maintained around 29 per cent as statutory liquidity ratio throughout the second quarter, higher than the mandated 24 per cent.

The money multiplier rose in the second quarter, keeping the money supply growth higher than RBI's indicative trajectory, even as base money decelerated. RBI said containing monetary growth would be a challenge in the backdrop of large market borrowing.