Corporates may lose credit to retail: Rakesh

The Reserve Bank of India deputy governor, Rakesh Mohan, today said corporates in the coming years would face greater competition for bank credit as banks explore emerging avenues such as retail credit.

The banking system has to respond adequately to these new challenges, opportunities and risks, Mohan said at the Annual Indian Securities Infrastructure and Operations Forum 2006.

"Innovative channels for credit delivery for serving new rural credit needs, encompassing full supply chain financing, covering storage, warehousing, processing, and transportation from farm to market will have to be found," he said.

In view of the expected large demand for bank credit, banks will have to simultaneously put in steps to increase deposit mobilisation. Concomitantly, it is important to keep monetary growth consistent with the requirements of price stability.

He said demand for bank credit is likely to remain strong in view of vast demands for financing the infrastructure investment, the growing size of the services sector, SMEs and rural enterprises. The emphasis on financial inclusion will also lead to enhanced need for financial intermediation.

Bank deposits as well as credit continued to record strong growth during 2006-07, which is indicative of strong demand conditions. Bank credit has continued to record year-on-year growth of over 30 per cent for third year in succession.

Mohan said bank credit has been largely broad-based, although some sectors, such as housing and other retail and commercial real estate, have expanded more rapidly.

In this context, he pointed out that the credit-GDP ratio in India - notwithstanding the sharp rise since 2000 - remains lower than in many Asian and advanced economies.

Deposit growth has accelerated, which could be attributed partly to higher interest rates on time deposits as well as extension of tax benefits for deposits above 5-year maturity.

Concomitantly, growth in broad money (M3), y-o-y, at 19.0 per cent as on October 13, 2006 remains above the indicative trajectory of 15.0 per cent.

By current indications, the growth in monetary and credit aggregates is now expected to be somewhat higher than the initial indicative projections, he noted.

In view of sustained demand for credit from the commercial sector, banks continue to restrict their incremental investments in Government securities. As a result, banks' holdings of SLR securities have declined to around 30 per cent as on October 13, 2006 from around 35 per cent a year ago.

As the ratio approaches the statutory minimum of 25 per cent, the flexibility available to banks by switching their asset portfolio in favour of credit to the commercial sector by restricting their incremental investments in SLR securities is, thus, getting progressively limited.

In the context of sustained high growth in bank credit, the RBI has raised risk weights and provisioning requirements for sectors witnessing large credit growth.

In view of the high credit growth, the RBI has also been drawing the attention of banks to the need to ensure asset quality in order to maintain financial stability, he said.