Gaining traction from the economic turnaround, the annual growth in bank credit has for the first time exceeded the Reserve Bank of India’s (RBI’s) estimate of 16 per cent for 2009-10, giving the regulator more room to raise policy rates to control inflation.
According to latest data from RBI, loan disbursement by scheduled commercial banks, including regional rural banks, recorded 16.04 per cent growth at the end of March 12, 2010, on a year-on-year basis. This is above RBI’s projection of 16 per cent credit growth in this financial year.
With loans worth Rs 35,527 crore disbursed in the fortnight ended March 12, banks are on track to meet the credit and deposit growth targets set by RBI.
“Given the recent trend of improvement in credit demand, it makes easier for RBI to raise rates going forward,” said Abheek Barua, chief economist, HDFC Bank.
While announcing the recent 25-basis point hike in both repo and reverse repo rates last week, RBI said, “As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected.”
Giving the rationale of the rate hike action, RBI said it would continue to monitor macroeconomic conditions, particularly the price situation, and take further action as warranted.
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Banks will have to lend an additional Rs 88,364 crore by the end of the month to meet the central bank’s credit target for 2009-10.
Though there is some demand for working capital and short-term funds, bank executives said the figures were not reflective of the real demand in the system. “These figures are not reflecting the sustained demand in the system. Banks are keen on lending to meet their year-end targets,” said a senior executive of a large public sector bank.
RBI Executive Director Deepak Mohanty said credit growth was broad-based with the infrastructure sector being a major beneficiary. Credit to small and medium units as well the agriculture sector was also growing.
During the fortnight, food credit grew by Rs 1,511 crore to Rs 49,402 crore, mainly due to a fall in procurement by the Food Corporation of India (FCI). Bankers said FCI generally sells old stocks at the end of a financial year.
At the same time, deposits went up by Rs 39,612 crore to Rs 44,02,943 at the end of March 12, while demand deposit fell by Rs 3,373 crore, time deposit went up by Rs 42,986 crore during the fortnight. On a year-on-year basis, deposits went up by 18.14 per cent. RBI has revised deposit growth to 18 per cent for this financial year.
Besides, banks were raising deposit rates as they see some pick-up in demand for credit and also they have to lend to reach their targets.
With higher deposit mobilisation, banks’ investment in government and other approved securities that qualify for treatment of statutory liquidity ratio rose by Rs 7,641 crore during the fortnight-ended March 12.
This increase was despite the credit offtake during the fortnight. At the end of March 12, banks’ investment in these instruments stood at Rs 13,86,937 crore as against Rs 11,80,132 crore in the corresponding period last year.