High credit growth needs to be sustained, says FM

Allaying concerns over liquidity crunch and the mismatch in growth of deposits and credit in the banking system, Finance Minister P Chidambaram today said interest rates in the economy will remain attractive for both borrowers and savers.

"The Reserve Bank of India will address the issue of tight liquidity in the banking system," Chidambaram said at the inauguration of Punjab National Bank's 2000th branch with core banking system.

While admitting that there was a mismatch between demand and supply of credit, with deposits growing at 16 per cent in 2005-06 while the advances grew at 30 per cent, Chidambaram said that the high credit growth needs to be sustained to maintain the high growth momentum that began in the second half of 2004.

Chidambaram said the high interest rates were reflective of demand for credit. "High bond yields are not a cause of worry," he added.

Chidambaram said that RBI has already taken the first step to tackle liquidity by allowing banks to raise FCNR deposit rates by 25 basis points to Libor rates. The apex bank is scheduled to announce its quarterly monetary review on April 18.

Chidambaram said that ways and means have to be found to bridge the deposit-credit gap and keep up the investment rate to sustain high growth. Pointing to the vast potential for credit growth, Chidambaram said that the banking system finances 35 per cent of gross domestic product (GDP) in the country against over 70 per cent in developed countries.

He expressed hope that farm credit by banks would cross the target of Rs 1,42,000 crore in 2005-06 and Rs 1,75,000 crore during 2006-07.