In what could be termed as a reflection of the global economic downturn, the year-on-year growth in bank credit to the commercial sector slowed down to 16.9 per cent during 2008-09, compared with 20.3 per cent in 2007-08.
According to the latest data released by the Reserve Bank of India (RBI) today, incremental credit flow to the commercial sector was estimated at Rs 4,34,406 crore as against Rs 4,31,296 crore a year ago. The outstanding amount was estimated at Rs 30,09,987 crore as of March 27, 2009 (the last fortnight of FY09), as against Rs 25,77,137 crore a year ago.
Bankers said that, though the global crisis’ adverse effects were visible since the beginning of the financial year, the sharp decline in growth became more evident in the second half, after the credit crisis intensified.
The Indian economy grew at 5.3 per cent in the third quarter ended December 2008 — the slowest pace in nearly six years — as private consumption and demand for investment fell because of the prevailing uncertainty in the wake of the global financial crisis.
“Overall demand from the industry for credit slowed down as companies put new projects on hold,” said Bank of Baroda Executive Director R K Bakshi.
The credit head of a large public sector bank said that a drop in the activity of foreign and private banks was also responsible for the moderation in commercial credit growth. Most of the foreign banks present in India had problems in their home markets. At the same time, private banks such as ICICI Bank saw their balance sheets shrinking after growing their business at a high pace in previous years.
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According to the RBI data, the money supply (M3) growth in 2008-09 was 18.6 per cent, a shade below the 19 per cent projected for the year. In January 2009, the central bank had raised the projection from 16.5-17 per cent. This was done in the context of a decline in the upside risks to inflation. Commodity prices dropped sharply and global liquidity came under pressure after the collapse of Lehman Brothers in September.
RBI took a number of steps, including repeated reductions in the cash reserve ratio to infuse liquidity into the system. Growth in money supply during the previous year was estimated at 20.7 per cent.
The year-on-year growth in the demand deposits with banks — one component of money supply — was almost flat at 0.2 per cent, compared with 19.2 per cent a year ago. Demand deposits are deposits with a tenure of less than one year and include current and savings bank accounts. Elaborating on the flat growth in demand deposits of the banking sector, Bakshi said that, with the stock markets coming down during the year, investors moved a part of their funds to term deposits which give better yields, rather than keep money in savings accounts.
Also, companies drew down their cash balances from the current accounts for expenditure when liquidity was tight. The accrual to cash balances was lower since profitability of companies across the sector came under pressure, he added.