Nomura sees credit, deposit growth converging following demonetisation

Demonetisation ecision resulted in a sharp surge in deposits and a slump in credit demand as it weakened economic activity, Japanese brokerage Nomura said in a report

After a year of weak bank credit growth and spike in deposits following demonetisation, credit and deposit growth have begun to converge, said a report.

On November 8 last year, the government had scrapped Rs 500 and Rs 1,000 banknotes as part of its efforts to fight black money, corruption and fake currencies.

The decision resulted in a sharp surge in deposits and a slump in credit demand as it weakened economic activity, Japanese brokerage Nomura said in a report today.

A year later, deposit growth has normalised at 9.8 per cent as of mid-October, while credit growth, led by services and personal loans, has risen to 7.7 per cent-- still below the pre-noteban trend when it was around 9 per cent but up from a trough of 4.1 per cent in early March, the report said.

"We expect this trend of convergence between credit and deposit growth to continue," the brokerage said.

It said a cyclical recovery and higher commodity prices should boost working capital needs, while the availability of growth capital after the recently announced bank recapitalisation plan should also enable public sector lenders to extend more loans.

This should push the credit-deposit ratio higher towards 75 per cent from 72.6 per cent in mid-October and tighten liquidity incrementally, the report said.