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Bank continue to lend less even as deposit growth improves, credit growth now at mere 6.5%

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Risk-averse banks continued to lend less to the clients despite the double-digit growth seen by bank deposits. The overall credit growth rate in the banking sector for the fortnight ending 8th May stood at 6.5%, while the bank deposit growth rate was at 10.6%, that according to Care Ratings. “The credit growth further moderated during the last two fortnights to 6.7% and 6.5% levels compared to a year-ago level of 13.0% (as of May 10, 2019). The declining trend in credit growth continued since the quarter ended March 2019 owing to the rise in risk aversion in the banking system and the lockdown due to COVID-19,” as Care Ratings said in a report.

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The credit growth rate in the banking sector was higher than the deposit growth rate until June 2019, according to data provided by Care Ratings. Since then the credit growth rate continued to fall while the deposit rate has been taken the complete opposite path. Since March 2019, the bank deposit growth rate has jumped slightly over 1% while the credit growth rate has tanked over 7%. The banking system continued to remain in a liquidity surplus of more than Rs.5.45 lakh crore during the week ended 88th May, as according to the report.

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Share of deposits to overall liabilities among the sector was seen to be stable at 90.5% after having fallen to 89.9% in March. The moderation in share has been largely due to a higher base of the total liabilities, which is because of an increase in currency in circulation. “The increase in currency in circulation can be attributed to a desire to hold more cash in the lockdown period,” as Care Ratings said. Banks have seen more time deposits rather than demand deposits, accounting for the majority of aggregate deposits. “ in April 2020, It seems like the depositors have tried to lock cash into time deposits as outstanding time deposits increased from Rs 119.54 lakh crore on 27th March, 2020, to Rs 123.91 lakh crore on 8th May, 2020, an increase of Rs.4.37 lakh crore during this period,” as the report said.
Since the situation created by coronavirus, the central govt and the Reserve Bank of India have been continued to make efforts to increase credit growth. The Central Bank in an out of the schedule monetary policy committee meeting last Friday announced a 40 basis point rate cut. According to Care Ratings, this move by the central bank can lead to a reduction in banks’ MCLR rates that in turn could reduce the borrowing cost.

 

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