Slipping below 16% in FY12

Seek cut in cash reserve ratio, repo rate in pre-policy meet.

Credit growth for the current financial year may slip below 16 per cent, bankers told Reserve Bank of India (RBI) officials today in the customary pre-policy meeting. RBI will announce its third-quarter review of monetary policy on January 24 .

According to bankers, credit growth has been hampered by low demand, amid high interest rates and a bleak macro-economic outlook.

“Most of the demand for loans came from the infrastructure sector in previous years. But as banks are now going slow on infra lending due to asset liability mismatch concerns raised by RBI, loan growth has fallen shparly this year,” said the chairman of a public sector bank.

RBI had expressed concern that while banks’ liability profile is short-term in nature, lending to core sector projects which are long-term would result in an asset-liability mismatch.

Bankers said year-on-year credit growth could fall below 16 per cent by the end of this financial year against RBI’s projection of 18 per cent.

According to data from RBI, bank advances grew 17.08 per cent annually as on December 16. Credit growth in this financial year so far (since March) has been only 8.2 per cent as compared to 12.3 per cent in the same period last year.

Most bankers have suggested a cut in the key repo rate (at which banks borrow from RBI ) by 25-50 bps. Some also suggest a cut in the cash reserve ratio.

A repo rate cut will help banks reduce lending rate and boost loan demand.

“A CRR cut is unlikely as inflation is still above RBI’s comfort zone. In addition, our feedback was liquidity is not all that bad. Banks are having excess government securities in the form of statutory liquidity ratio to the extent of 29 per cent, which translates into Rs 3 lakh crore,” said the chairman of a public sector bank who attended the meeting.

In the mid-quarter review held in December, the central bank had kept the repo and cash reserve ratio unchanged at 8.5 per cent and six per cent, respectively. The repo rate has hardened by 375 bps since March 2010 as the central bank tried to control demand side inflation.

In order to protect credit demand, banks have not increased lending rates. The regulator pointed out that banks must ensure effective transmission in interest rates.