There is a clear sign of resource pressure on banks, with the incremental credit-deposit ratio during the second quarter touching 80%. Despite tight credit conditions, banks have lent very high amounts in Q208-09. Between July and September, banks lent Rs 1,29,396.4 crore - the highest Q2 growth despite high interest rates.
According to the latest RBI data, the outstanding amount of total domestic loans disbursed by banks touched Rs 2,542,467 crore as on September 26, while total deposits touched Rs 34,42,137.62 crore. The year-on-year credit growth works out to 24.8%, way above the projected growth of 20% for the year.
At these levels, while incremental loans between July and September 2008 amounts to Rs 1,29,396.4 crore, incremental deposits work out to Rs 1,62,670.6 crore, resulting in an incremental credit-to-deposit ratio of 79.5% for the quarter.
This is one of the highest Q2 growth levels that banks have seen. Typically, the period between July and September is seen as part of the slack season, when there is not much demand for loans from corporate, as they go slow on their new investments because of rains during this period.
Bankers say much of the credit demand is from oil companies and PSUs to meet their input demands. Also, there is some working capital requirements from corporates with on-going projects.
But corporates, which are now finding it difficult to raise money from overseas debt markets because of the ongoing turmoil, are now borrowing from domestic banks, they say. As a result, despite high lending rates, they are still borrowing from banks. The outstanding credit-to-deposit ratio of banks is currently at around 74%.
The demand appears to be so strong that banks with a surplus stock of government bonds (they need to park at least 25% of the deposits they raise in government bonds) are selling bonds to fund the loan demand. The investment-(in government bonds) to-deposit ratio for the entire banking system has further dipped to 28.5% as on September 26, leaving very little leeway for banks to further offload their stock of bonds.
Given such high lending levels, from the monetary policy point of view, is a cause for concern as higher credit growth through its interplay with deposits, ends up pushing up the growth in money supply. The annual money supply growth as on September 12 is 21%, way above the central bank’s comfort level of 16.5-17%.
Since such a high growth in money has happened despite monetary tightening through signalling higher rates, further easing of monetary conditions has become difficult for RBI.
While from the point of bank balance sheets, it is not considered a healthy sign to rely on non-deposit resources to lend. The central bank has already warned about its implication on bank profitability in its latest report on currency and finance.
With banks requiring to park 8.5% of deposit as CRR with the central bank, and another 25% in government bonds, banks should be lending 63.5% of their deposits as loans.
Source: The Economic Times
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