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Bank's Credit Growth - A Case of Once Bitten Twice Shy?
Oct 25, 2016

Banks are in no mood to lend. According to a report by Livemint yesterday, overall bank deposits for the country crossed the Rs 100 trillion levels for the first time ever. However, both the credit and deposit growth rates for the banks have tapered over the past few years.

Despite the central bank reducing rates over the past year, banks have not been able to completely pass on these rate cuts to its borrowers. What is stopping the banks from doing so? The Reserve Bank of India (RBI) performed its asset quality review on the banks books last year. Since then asset quality for the banks have witnessed a steep deterioration. With slippages rates increasing at over twice rate that banks are lending, banks now seem shy to lend.

Higher lending rates are necessary for the bank to earn a higher spread from the loans it disburses. Also, since the banks own a lot of government securities, a reduction in the repo rate by the central banks has provided massive gains for the banks in its treasury income due to increased bond prices. These higher profits are being used to mask losses arising due to higher provisioning. The fear of provisioning and bad loans is so high that banks are now curtailing their loan books too as witnessed by the slowdown in its credit growth rate. The banks are also struggling to raise low cost deposits from the retail customers due to a high savings rate offered by government savings instruments like PPF, KVP which have favourable tax implications than a bank fixed deposit etc. At present, it looks like the bad loans problem might just continue longer for another 4-6 quarters at least.

Data Source: CMIE
*Forecasted CMIE data for FY17

This Chart Of The Day was published in The 5 Minute WrapUp - The Tortoise Approach to Multibagger Returns

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