Credit fever gets too hot to handle

The Reserve Bank of India's (RBI) attempts at cooling the credit market are refusing to bear fruit. The growth in bank credit to the commercial sector continued at a blistering pace in the first quarter of 2006-07, despite rise in lending rates.

Non-food credit expanded by Rs 40,789 crore up to July 7, 2006 in 2006-07, much higher than Rs 26,053 crore during the same period a year earlier.

"Scheduled commercial banks' non-food credit, on a year-on-year, basis registered a growth of 32.9 per cent as on July 7, 2006 on top of a base as high as 31 per cent a year ago," RBI said in its report on macroeconomic and monetary development in the first quarter released on the eve of 2006-07 monetary policy review.

The RBI had sought to moderate credit growth in 2006-07 through measures like higher provisioning requirements on certain category of loans and projected a 20 per cent growth in credit in 2006-07.

During April-June 2006, banks raised their benchmark prime lending rates (BPLRs) by 25-50 basis points, lagging the 25-100 basis points increase in deposit rates. One basis point is one hundredth of 1 per cent.

Reflecting the acceleration in deposits growth, incremental credit-deposit ratio of banks has shown some moderation in recent months, but still remains high, hovering around 100 per cent.

Banks' demand deposits decline during the first quarter of 2006-07, while time deposits rose sharply higher than a year ago.

The decline in demand deposits during the quarter ended June 2006 could be partly attributed to unwinding of the large accretion during the previous quarter ended march 2006.

Banks' time deposits' growth at 19.3 per cent year-on-year as on July 7, 2006 was higher than 13.4 per cent recorded a year ago, reflecting the higher interest rates as well as the base effect.

Interest rates on time deposits of 1-3 year maturity offered by public sector banks have increased from 5.75-6.75 per cent in March 2006 to 5.75-7.00 per cent by June 2006.

Private sector banks have been more aggressive in raising deposit rates. The rates offered by private sector banks on similar maturity deposits moved from 5.57-7.75 per cent to 6.50-7.50 per cent.

The higher growth in bank deposits with the increase in interest rates has seen slowing of increase in postal deposits. The rise in postal deposits, which was on an upward trajectory between April 2003 and December 2004, moderated to 14.6 per cent year-on-year at the end of March 2006 from a peak of 23.3 per cent in December 2004.