Supporting credit growth a challenge

Sounding a note of caution over the declining loan growth rate, now at a 12-year low, the Reserve Bank of India (RBI) today identified slow credit growth as a key challenge for economic recovery.

In addition, it said banks would face more pressure in mopping low-cost deposits through current and savings account balances.

“Going forward, the challenge for the banking sector will be to support credit growth as the Indian economy moves closer to the higher growth trajectory, while ensuring the efficiency and soundness of the sector,” the central bank said today.

Bank credit growth for the fortnight ended October 9 was 10.75 per cent, data released by RBI showed. Though the central bank emphasised on loan availability for economic growth, it said banks needed to balance the risk-return trade off. “With the economy showing some signs of recovery after the slowdown, the banking sector needs to gear up to meet the credit needs of the economy. During an uptrend, banks will have to tread the balance between risk and return carefully,” RBI said.

In a trend reversal, the off-balance sheet exposures of banks, which witnessed exponential growth in recent years, declined 26.4 per cent on a year on year basis, partly due to the prudential regulation implemented by the central bank.

Raising concern on the declining growth of low cost deposits and the current accounts–savings accounts (Casa) of banks, RBI said banks needed to take initiatives to attract more such deposits. “The declining share of Casa deposit in total deposits and the deceleration in their growth may pose a challenge for the banking sector. In the context of impending revival of economic growth, with commensurate increase in the credit needs of the economy, the banking industry may require to take initiatives to attract more Casa deposits,” RBI said.

Since Casa deposits constituted the cheapest source of funds, in case these dry up, alternative sources for mobilising resources would not only be difficult but also expensive, RBI said.

Banks pay no interest on current accounts and only 3.5 per cent on savings accounts. Casa deposits constitute one-third of all deposits in India.

The growth of Casa deposits slowed during 2008-09 to 13.4 per cent from 20.2 per cent recorded in the previous year. RBI said their growth fell steeply for private and foreign banks, while for nationalised government banks, the fall was marginal.

For SBI and its associates, growth of Casa deposits in 2008-09 remained at the same level as in the previous year.

“As at end-March 2009, the share of current deposits was higher than saving bank deposits for foreign banks, while for other bank groups, the share of saving bank deposits is higher,” RBI said.

Current deposits and saving bank deposits grew by 6.7 per cent and 17.4 per cent, respectively, in March 2009, as compared to 24.6 per cent and 17.8 per cent in March 2008.