Industrial credit subdued: RBI

Of the four-fold increase in bank advances, over two-thirds of the total bank credit during April-August 2004 went to retail lending, according to the Reserve Bank of India's (RBI's) 'Report on Trend and Progress of Banking in India, 2003-2004'.

In 2003-04, industrial credit expanded by 5.9 per cent, half the 13.6 per cent growth rate in the preceding financial year (2002-03).

Credit offtake by industry remained relatively subdued amid buoyancy in industrial activity, the RBI's report states, adding that stronger corporates strengthened their balance sheets by taking recourse to internal accruals as well as external commercial borrowings.

The RBI report says there has been some evidence of a revival in investment activity in 2004-05, with companies scaling up production plans. There are expectations that the credit needs of industry are likely to gain momentum in the current financial year.

However, the report also highlights that in the previous years credit growth had come largely on the back of retail loans, priority sector lending and infrastructure projects.

The central bank noted that the surge in retail lending, however, had certain limitations. It may accentuate the indebtedness of households, with implications for the sustainability of private consumption and savings in the medium to long term. The rapid increase in retail loans may impinge on bank credit for investment activity, with implications for economic growth.

The RBI cautioned that several studies suggested that retail lending may pose various risks, with implications for banks' asset quality. Bad loans from retail lending account for 2.5 per cent of total loans outstanding, the report adds.

During 2004-05, credit by scheduled commercial banks was more than four times the figure recorded in the corresponding period of the previous year at Rs 1,47,491 crore (17.5 per cent), compared to Rs 33,088 crore (4.5 per cent) in the corresponding period of 2003-04.

Food credit increased by Rs 3,751 crore versus a decline of Rs 13,459 crore in 2003-04. During the same period, non-food credit posted a robust increase of Rs 1,43,741 crore (17.9 per cent), compared with an increase of Rs 46,539 crore (6.8 per cent) in the corresponding period of 2003-04.

The incremental non-food credit-deposit ratio was substantially higher at 127.8 per cent during 2004-05 (up to October 29, 2004) as against 40.4 per cent in the corresponding period of 2003-04.