Festive season fails to boost growth in loans

The festive season has failed to cheer banks, with the growth in loans showing no signs of picking up, amid high interest rates. Credit growth, on a year-on-year basis, fell to 19.45 per cent from a high of 21.5 per cent during the beginning of the financial year. What makes matters worse is loans saw negative growth in the first week of October, falling by Rs 68,533 crore.

Deposit growth, on the other hand, improved this financial year, standing at 17.36 per cent on a year-on-year basis. However, it fell by nearly Rs 83,000 in the first week of October.

"Borrowers, both retail as well as corporate, expect some stabilisation in interest rates. Once that happens, credit growth is expected to pick up in the busy season," said N Seshadri, executive director, Bank of India.

The fall in the first week of October follows the robust growth in the last week of September, as banks shore up their balance sheets to meet quarterly targets. In the last week of September, loans grew by Rs 1.24 lakh crore, while deposits rose by 1.77 lakh crore.

According to P Sitaram, chief financial officer, IDBI Bank, the drop in outstanding credit is on account of the unwinding of short-term corporate credit. "This is the trend seen at the end of every quarter. There is also a genuine slowdown in demand, reflecting the moderation in economic growth," he said.

The incremental credit-deposit ratio, which reflects the amount banks lend for every rupee deposit, fell to 55 per cent in the first six months of the current financial year from 76 per cent recorded in the same period of the previous financial year.

The slackness in credit growth is due to rate rises by the central bank. The Reserve Bank of India (RBI) is expected to raise the rate by 25 basis points in its next policy review.

Banks which has responded to the central bank's rate rise had increased their benchmark lending rates by 250-275 basis points in the last 15 months. RBI has scaled down its 2011-12 credit growth target from 19 per cent to 18 per cent, while maintaining the deposit growth target at 17 per cent. Bankers said RBI may further lower the banks’ credit growth projection during the policy review next week.