The global financial meltdown is significantly changing the growth dynamics of the Indian banking sector.
While banks have been criticised in recent months for playing it safe by parking funds in government securities, the latest data released by the Reserve Bank of India today showed that public sector banks have seen a sharp increase in lending for the year up to January 2, 2009. In contrast, private and foreign banks have seen a drop in credit growth during the period (see table).
Public sector bank executives said that a part of the reason for the high growth, above the overall industry growth rate, was the shift in demand from private and foreign banks. “Many borrowers, who were banking with private or foreign banks in recent years, have come back to us now as they are finding it difficult to raise money,” said a senior executive at a Delhi-based bank.
In any case, with overseas sources of funding drying up and companies unable to access money from the equity markets, the demand has shifted to the domestic arena.
In case of foreign banks, the growth rate has moderated partly due to the experience of their global parents. On a year-on-year basis, the credit growth of foreign banks operating in India dipped from 30.7 per cent for the year up to January 2008 to 16.9 per cent in January 2009.
Indian Banks’ Association chief executive R Ramakrishna said some of the foreign banks are facing deep crisis in their home countries. They need funds and lot of funds have flown out. So, money available for requirement in India is low, he added.
In case of Indian private banks, the drop is still steeper as many of them, including the likes of ICICI Bank, the largest in the segment, are in an asset shrinking mode. “These banks are now consolidating their business to control non-performing assets and improve recoveries,” said a banker.
| BANKING ON THE PUBLIC SECTOR Credit flow from scheduled commercial banks | |||||
| Item | Outstanding as on Jan 2, ‘09 | Variation (Y-o-Y) As on Jan 4, ‘08 (Rs crore) | % change | Variation (Y-o-Y) As on Jan 2, ‘09 (Rs crore) | % change |
| Public sector banks | 19,23,953 | 2,47,633 | 19.8 | 4,28,302 | 28.6 |
| Foreign banks | 1,73,451 | 34,834 | 30.7 | 25,016 | 16.9 |
| Private banks | 4,98,107 | 86,731 | 24.2 | 52,375 | 11.8 |
| All scheduled commercial banks* | 26,58,997 | 3,77,855 | 21.4 | 5,14,980 | 24.0 |
| Provisional data; * Includes regional rural banks; Source: RBI | |||||
Public sector bank executives also said that a part of the reason for the spurt in lending was pressure from the government, which has forced them to lower lending rates by up to 150 basis points over the last three months. In contrast, foreign and private banks have lowered lending rates by around 50 basis points.
The higher-than-expected growth has resulted in the finance ministry asking banks to increase their lending targets for the year.
