Deposits, credit: The mismatch - Views on News from Equitymaster

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Deposits, credit: The mismatch

Sep 14, 2001

In absence of investment opportunity, non-food credit growth of schedule commercial banks (SCBs) is decelerating. On the other hand deposit accumulation by banks is increasing by leaps and bounds, thanks to sluggish capital markets. During the period April-August 2001, outstanding non-food credit by SCBs increased by Rs 41 bn, substantially lower than Rs 159 bn expansion recorded in the corresponding period of the previous year. The YoY growth declined to 11.6% in August compared with an impressive 21.7% growth in August 00. The contraction in credit offtake clearly reflects sluggish industrial growth in the current year.

This is again confirmed by a marginal growth of 2.1% in the Index of Industrial Production (IIP) in the first quarter of FY02. This compares with a healthy growth of over 5% recorded in 1QFY01. The June quarter growth rate was the lowest since the first quarter of FY95 when IIP grew by just 1%. The decline in capital goods sector by 4.2% adversely affected the overall growth rate. Extremely weak demand, both in the domestic and the global markets has resulted in the downtrend in the industrial activity. Weak commodity cycle worldwide has squeezed the margins of industrial sector and the outlook continues to remain weak.

Consequently, banks are flushed with the excess liquidity and their investment in the government securities is increasing. The figure stood higher at Rs 354 bn during April-August 2001 as compared with Rs 239 bn invested during the corresponding period of FY01.

Also, impressive growth in deposits is contributing to the easy liquidity in the banking system. Since the beginning of the fiscal year 2001, total deposits (demand and time) of SCBs have growth at an average 20% per month. The rise in deposit with banks could be a combined result of depressed equity market and lack of confidence in mutual funds and in cooperative banks.

Meanwhile, food credit continues to rise at a rapid pace in FY02. During the period April-August 2001, food credit expanded by Rs 112 bn compared to Rs 60 bn in the same period last year. In August 01, food credit grew at a strong rate of 61% compared to 50% in the corresponding period of the previous year. Overall, credit growth slowed down to 15% in August 01 against 23% in August 00.

The positive effect of lower interest rates is expected to get reflected in the second half of the current year. Credit growth could show an upward trend then.

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