Retail credit slows, RBI vigil intact

Finally, there are some signs of a slowdown in retail credit growth, but the Reserve Bank of India (RBI) is not willing to slacken its monitoring of banks' retail lending portfolios.

RBI Deputy Governor Rakesh Mohan today said, "Retail credit has grown by 47 per cent, but we need to keep an eye on that."

He was speaking at the global banking conference organised by the Federation of Indian Chambers of Commerce and Industry and the Indian Banks Association.

In May, retail lending by banks had risen by 74 per cent year on year, driven by a 115.5 per cent increase in housing loans in the first two months of 2006.

The slowdown follows the RBI decision to hike the capital requirement for home loans and other personal loans as well as a rise in interest rates.

Retail credit expanded between 22 per cent and 41 per cent since 2001-02 and accounted for 26.7 per cent of the incremental non-food credit in the banking system in 2005-06. The share of advances to individuals increased from about 10 per cent of total bank credit in March 2002 to nearly 25 per cent in January 2006.

Since 1991, the share of retail loans in the banking system's overall loan portfolio jumped from 6.4 per cent to 22 per cent.

Mohan cautioned banks against the faster growth in credit than deposits. "It is extremely important for banks to concentrate on deposit growth so that resources match credit growth," he said.

The increase in non-food bank credit was 32.9 per cent (Rs 3,71,993) in 2005-06, on top of an increase of 31 per cent (Rs 2,60,164 crore) in 2004-05. The growth in deposits was far lower than this.

The deputy governor pointed out that banks had nearly exhausted the leeway provided by excess statutory liquidity ratio investments and that there could not be credit growth at the current pace without a matching increase in resources.

"Consumer credit is growing at the rate of 30-35 per cent and is a tad lower than last year because of the base level," said ICICI Managing Director and CEO KV Kamath. This growth, according to him, is being led by rising consumer aspirations.

State Bank of India Managing Director TS Bhattacharya said, "SBI did not see much credit growth in the first quarter of 2006-07 but the consumer and SME segments drove credit growth in the second quarter."

He also pointed out that the second half of this year would see the emergence of greater demand for long-term loans.

"The challenge is to raise long-term liabilities (resources) against reducing tenure of current and savings accounts deposits," he said.