The Liquidity Trap

State Bank of India (SBI) chairman Janaki Ballabh had said in Bangalore last week that the first trace of credit offtake was witnessed in June. That might be the case for SBI but, otherwise, industry data does not reflect any jump in credit offtake. Banks have been caught in a liquidity trap, and after the UTI crisis money has already started flowing out of mutual funds to bank deposits.

If this is one side of the coin, the other side has apprehensions of a further dip in credit growth. By arresting UTI executives, including its former chairman P S Subramanyam, the sleuths of the Central Bureau of Investigation (CBI) have dented the morale of the Indian financial sector. Nobody is willing to take any decisions on loans or investments at this juncture.

Consider this data. Deposits in the first quarter grew by Rs 50,456 crore. The comparable figure for last year was Rs 40,360 crore and Rs 15,170 crore the year before. Credit is not growing